**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-K**

** **

**(MarkOne)**

 
| **ý**                                      | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF  1934** |
|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
|                                            |       |                                                                                           |
| **For the fiscal year ended December 31, 2005** |
|                                            |       |                                                                                           |
| **o**                                           | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934**                 |

 

**For the transition period from            to            **

 

**Commission file number 001-14775**

 

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**DYNAMIC MATERIALS CORPORATION**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **84-0608431**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation or Organization) |       | (I.R.S. Employer Identification No.) |

 

**5405 Spine Road, Boulder, Colorado 80301**

(Address of principal executive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:  **None**

 

Securities registered pursuant to Section 12(g) of the Act:  **CommonStock, $.05 Par Value**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

 

Yes o  No  ý

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.

 

Yes  o  No  ý

 

Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý  No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. Large accelerated filer  o  Acceleratedfiler  ý  Non-accelerated filer  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).

 

Yes  o  No  ý

 

Theapproximate aggregate market value of the voting stock held by non-affiliatesof the registrant was $105,336,504 as of June 30, 2005.

 

Thenumber of shares of Common Stock outstanding was 11,772,420 as of February 28,2006.

 

 

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**PART I**

 

**ITEM**1**.          Business**

 

**Overview**

 

DynamicMaterials Corporation is a leading provider of explosion-welded clad metalplates. Explosion-weld cladding uses an explosive charge to bond togetherplates of different metals that do not bond easily with traditional weldingtechniques. The process of welding the metal plates through an explosion is alsoknown as “shooting.”  We refer to thispart of our business as “DMC Clad” or the “Explosive Metalworking” segment.Detacladâ is the main trade name under which DMC Cladmarkets its explosion-welded clad products. DMC Clad’s products are used incritical applications in a variety of industries, including upstream oil andgas, oil refinery, petrochemicals, hydrometallurgy, aluminum production,shipbuilding, power generation and industrial refrigeration. DMC Clad’s marketleadership for explosion-welded clad metal plates is a result of itsstate-of-the-art manufacturing facilities, technological leadership andproduction expertise. We believe our customers select us for our high qualityproduct, speed and reliability of delivery, and cost effectiveness. We have aglobal sales force that allows us to access international markets. OurExplosive Metalworking operations are located in Pennsylvania, France andSweden.

 

Throughour AMK Welding segment (“AMK Welding”), we also provide advanced weldingservices, primarily to the power turbine and aircraft engine manufacturingindustries. AMK Welding is a highly specialized welding subcontracting shop forcomplex shapes used principally in gas turbines and aircraft engines. AMKWelding’s operations are conducted at its South Windsor, Connecticut facility.

 

**Clad Metals Industry**

 

Cladmetal plates are used in the construction of heavy, corrosion resistantpressure vessels and heat exchangers for upstream oil and gas, oil refinery,petrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration and similar industries. Clad metal platesconsist of a thin layer of an expensive, corrosion resistant metal such astitanium or stainless steel, which is metallurgically combined with a lessexpensive, less corrosion resistant, thicker base metal, typically carbonsteel. There are four common ways to use such corrosion resistant metals incorrosion resistant vessels:

 

•      Solidmetal construction

•      Rollbondclad metals

•      Weldoverlay clad metals

•      Explosion-weldedclad metals

 

Thevarious cladding technologies were developed to produce materials withproperties similar to those of a solid metal, but at a lower cost. The mostappropriate and cost-effective alternative for an end-user depends on both thetype of application and the clad metal thickness required. While explosion-welded,rollbond and weld overlay are competing cladding technologies, there arelimitations on the product that each can produce. Explosion-welded cladtechnology is the only one of these processes suitable for joining titanium,zirconium or tantalum metals to a base metal.

 

Theuse of a solid metal is frequently the lowest cost alternative for metalthicknesses of less than 0.75 inch. However, it is generally the most expensivealternative for greater thicknesses.

 

Therollbond technology is performed by several of the world’s heavy plate mills.In this process, the clad metal and base metal are bonded together during a hotrolling process in which a slab of metal is converted to plate. Rollbond cladmetals are cost-effective in metal thicknesses up to two inches, depending onthe metal alloy type. Producing clad metals using the rollbond process iscapital intensive, and capacity expansions cannot be achieved quickly ifexisting equipment is not already in place, although the machinery at most heavyplate mills can over time be converted to produce rollbond products. Rollbondproducts have lower bond shear strength and corrosion resistance, which limitstheir use in certain applications, and rollbonding may only be used for arelatively small group of metal combinations due to metallurgical compatibilityissues.

 

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Inweld overlay cladding, which is typically performed by equipment fabricators,the cladding layer is deposited on the base metal using arc-welding typeprocesses. Weld overlay is a cost-effective technology for complicated shapes,field service jobs and for production of heavy wall pressure vessel reactors.Due to distortion and dilution concerns, overlay is rarely used for newconstruction of equipment that is less than two inches thick. Dilution occurswhen the properties of two bonded metals change at the point of the bond. Weldoverlay clad metals have corrosion resistance that can be compromised bydilution, which limits their use in certain applications. As with rollbond,weld overlay may only be used for a specific group of metal combinations due tometallurgical compatibility issues.

 

Explosion-weldedclad products retain the properties of the original metals before they werebonded, such as corrosion resistance and mechanical properties, unlikematerials produced by rollbond or weld overlay. There is no dilution of theoriginal metals and the alloy chemistry is constant over the full thickness ofthe product. When fabricated properly, the two metals will not come apart, evenunder the most extreme circumstances. The explosion-welded clad process issuitable for joining most metals used to construct vessels and equipment usedin corrosive applications, whereas rollbond and weld overlay are limited tocertain compatible metal combinations. Explosion-welded clad metal is used tocreate flat plates, concentric cylinders, formed heads and transition joints. Explosion-weldcladding is suitable for creating a product that has a cladding thickness of0.04 inch to two inches and a base thickness of 0.25 inch to forty inches.Depending on alloy type, explosion-welded clad metals are often the most costeffective solution for metal thicknesses of between one and five inches. Whilerollbond most frequently bonds stainless steel or nickel alloy to a steelplate, welding zirconium, titanium or tantalum to a steel plate or to an alloyplate can only be done by explosion-weld cladding.

 

**Clad Metals End Use Markets**

 

Explosion-weldedclad metal is primarily used in construction of large industrial equipmentinvolving high pressures and temperatures, and which need to becorrosion-resistant. The eight broad industrial sectors discussed belowcomprise the bulk of demand for DMC Clad’s business. The demand for clad metal isdriven by the underlying demand for new equipment and facility maintenance inthese primary market sectors. Overall, the market for explosion-welded clad metalhas continuously grown since its inception, with demand dependent upon theunderlying needs of the various market sectors. During the past two years,there has been significant capital investment in many of these markets. Thiscurrent increase in demand is mainly attributable to strong markets for energy,metals, and petrochemicals.

 

*Upstream Oil and Gas*:  Theupstream oil and gas industry covers a broad scope of operations related torecovering oil and/or gas for subsequent processing in refineries. Clad metal isused in separators, glycol contactors, piping, heat exchangers and otherrelated equipment. The increase in oil and gas production from deep, hot, andcorrosive fields has significantly increased the demand for clad equipment. Atcurrent energy price levels, many non-traditional energy production methods arepotentially commercially viable. These include liquid fuel production processessuch as coal gasification, oil recovery from tar sands, and ethanol productionfrom agricultural products. Also methods for transport or transformation ofnatural gas become viable, such as natural gas liquification and conversion ofgas to liquid petroleum products. Virtually all of these processes involveconditions which require clad metal in some of the equipment. The primary cladmetals for this market are stainless steel and nickel alloys clad to steel,with some use of reactive metals.

 

*Oil Refinery*:  Petroleum refining processesare frequently corrosive, hot, and high pressure. Clad metal is extensivelyused in a broad range of equipment including desulfurization hydrotreaters,coke drums, distillation columns, separators and heat exchangers. In the UnitedStates, refineries are running near full capacity, and adding capacity andreducing costly down-time are a high priority. The increasing reliance upon lowquality, high sulfur crude further drives demand for new corrosion resistantequipment. Worldwide trends in regulatory control of sulfur emissions in gas,diesel and jet fuel are also increasing the need for clad equipment. Like theoil and gas sector, the metals of construction are primarily stainless steeland nickel alloys.

 

*Chemical and Petrochemical*:  Manycommon products, ranging from plastics to drugs to electronic materials, areproduced by chemical processes. Because the production of these items iscorrosive and conducted under high pressure or temperature, corrosion-resistantequipment is needed, which may be produced most cost-effectively using cladconstruction. One of the larger applications for titanium-clad equipment is inthe manufacture of Purified Terephthalic Acid (“PTA”), a precursor product forpolyester, which is used in everything from carpets to plastic bottles. Thismarket requires extensive use of stainless steel and nickel alloy, but alsouses titanium and, to a lesser extent, zirconium and tantalum.

 

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*Hydrometallurgy*:  Theconversion of raw ore to metal generally involves high energy and/or corrosiveprocesses. Traditionally, most metals have been produced by high temperaturesmelting. Over the past two decades there has been an increasing trend towardacid leaching processes. These hydrometallurgy processes are moreenvironmentally friendly and more energy efficient. The processes forproduction of nickel, gold, and copper involve acids, high pressures, and hightemperatures. Titanium is the material of choice. Titanium-clad plate is usedextensively for construction of autoclaves and peripheral equipment. Increasingdemand for metals in the current world market provides the impetus for asignificant number of new mining and hydrometallurgy projects.

 

*Aluminum Production*: Aluminum is reduced from its oxide in large electro-smelter facilitiescalled potlines. The electric current power is carried via aluminum conductors.The electricity must be transmitted into steel components for the hightemperature smelting operations. Aluminum cannot be welded to steelconventionally. Explosion-welded aluminum-steel transition joints provide anenergy efficient and highly durable solution for making these connections.Modern potlines may use as many as 50,000 to 100,000 transition joints. Theparts are typically replaced when the potlines are refurbished, commonly everyseven years. Although aluminum production is the major electrochemicalapplication for DMC Clad products, there are a number of other electrochemicalapplications including production of magnesium, chlorine and chlorate.

 

*Shipbuilding*:  The combined problems ofcorrosion and top-side weight drive significant demand for our aluminum-steeltransition joints. Top-side weight is often a significant problem with tallships, including cruise ships, naval combatants, ferries and yachts. Use ofaluminum in the upper structure and steel in the lower structure providesstability. Bolted joints between aluminum and steel corrode quickly. Aluminumcannot be welded directly to steel using traditional welding processes. Weldedjoints can only be made using transition joints. DMC Clad products can be foundon many well known ships, including the QE II and modern U.S. Navy aircraftcarriers.

 

*Power Generation*: Fossil fuel power generation plants require extensive use of heatexchangers, many of which require corrosion resistant alloys to handle lowquality cooling water. Our clad plates are used extensively for heat exchangertubesheets. The largest clad tubesheets in conventional steam plants are usedin the final low pressure condensers. For most coastal and brackish watercooled plants, titanium is the metal of choice technically and titanium-cladtubesheets are the low cost solution.

 

*Industrial Refrigeration*:  Heatexchangers are a core component of refrigeration systems. When the coolingwater is seawater, brackish, or even slightly polluted, corrosion resistantmetals are necessary. Metal selection can range from stainless steel to copperalloy to titanium, and explosion-welded clad metal is often the low costsolution for making the necessary components. Applications range fromrefrigeration chillers on fishing boats to massive air conditioning units forskyscrapers metal, airports, and deep underground mines.

 

**AMK Welding End Use Markets**

 

Partsfor power turbines and aircraft engines must be machined to exacting tolerancesand welded according to exacting specifications. Many of those parts havecomplex shapes, the welding of which requires significant expertise. AMK Weldingis a specialized operation that welds complex, shaped parts for machiningcompanies that, in turn, supply the manufacturers of power turbines andaircraft engines. Some machining companies also have their own weldingfacilities, which compete with AMK Welding for business.

 

**Business Segments**

 

Weoperate two business segments: Explosive Metalworking (which we also refer toas DMC Clad) and AMK Welding. The Explosive Metalworking segment usesproprietary explosive processes to fuse dissimilar metals and alloys and has 40years of experience. We believe we are the largest explosion-welded clad metalmanufacturer in North America, and our two plants in Europe provide us with aleadership position in the European market. AMK Welding utilizes various specializedtechnologies to weld components for use in commercial and military jet enginesas well as power-generation turbines and has 40 years of experience.

 

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**Explosive Metalworking**

 

TheExplosive Metalworking segment seeks to build on its leadership position in itsmarkets. The Explosive Metalworking segment currently represents approximately95% of our revenue. The three manufacturing plants and their respectiveshooting sites in Pennsylvania, France and Sweden provide the productioncapacity to address concurrent projects for DMC Clad’s current domestic andinternational customer base.

 

Theprimary product of the Explosive Metalworking segment is explosion-welded cladmetal plate. Clad metal plates are used in the construction of heavy, corrosionresistant pressure vessels and heat exchangers for upstream oil and gas, oilrefinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding,power generation, industrial refrigeration and similar industries. Thecharacteristics of DMC Clad’s explosive metalworking processes may enable thedevelopment of new products in a variety of industries and DMC Clad continuesto explore such development opportunities.

 

Theprincipal product of metal cladding, regardless of the process used, is a metalplate composed of two or more dissimilar metals, usually a corrosion resistantmetal and steel, bonded together. Prior to the explosion-welded clad process,the materials are inspected, the mating surfaces are ground, and the metalplates are assembled for cladding. The process involves placing a sheet of thecladder over a parallel plate of backer material and then covering the claddermaterial with a layer of specifically formulated explosive. A small gap or“standoff space” is maintained between the alloy cladder and the backersubstrate. The explosion is then initiated on one side of the cladder andtravels across the surface of the cladder forcing it down onto the backer. Theexplosion happens in approximately one-thousandth of a second. The collisionconditions cause a thin layer of the mating surfaces to be spalled away in ajet. This action removes oxides and surface contaminants immediately ahead ofthe collision point. The extreme pressures force the two metal componentstogether, creating a metallurgical bond between them. The explosion-welded cladprocess produces a strong, ductile, continuous metallurgical weld over the cladsurface. After the explosion is completed, the resulting clad plates areflattened and cut, and then undergo testing and inspection to assureconformance with internationally accepted product specifications.

 

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**EXPLOSION-WELDING PROCESS**

Explosion-weldedcladding technology is a method to weld metals that cannot be welded byconventional processes, such as titanium-steel, aluminum-steel, andaluminum-copper. It can also be used to weld compatible metals, such asstainless steels and nickel alloys to steel. The cladding metals are typicallytitanium, stainless steel, aluminum, copper alloys, nickel alloys, tantalum,and zirconium. The base metals are typically carbon steel, alloy steel,stainless steel and aluminum. Although the patents for the explosion-weldedcladding process have expired, DMC Clad has proprietary knowledge thatdistinguishes it from its competitors. The entire explosion-welded processinvolves significant precision in all stages, and any errors can be extremelycostly as they result in the discarding of the expensive raw material metals.DMC Clad’s technological expertise is a significant advantage in preventingcostly waste.

 

Explosion-weldedclad metal is used in critical applications in a variety of industries,including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, industrial refrigerationand other industries where corrosion, temperature and pressure combine toproduce demanding environments. Explosion-welded clad metal is also used toproduce bimetal welding transition joints or other components which are used inship construction, and in a variety of electrochemical industries includingaluminum production.

 

DMCClad’s metal products are primarily produced on a project-by-project basisconforming to requirements set forth in customers’ purchase orders. Uponreceipt of an order, DMC Clad obtains the component materials from a variety ofsources based on quality, availability and cost and then produces the order inone of its three manufacturing plants. Final products are processed to meetcontract specific requirements for product configuration and quality/inspectionlevel.

 

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**AMK Welding**

 

AMKWelding employs a variety of sophisticated processes and equipment to providespecialized welding services principally to a power turbine manufacturer andcommercial and military aircraft engine manufacturers. AMK Welding is locatedin South Windsor, Connecticut.

 

Weldingservices are provided on a project-by-project basis based on specifications setforth in customers’ purchase orders. Upon receipt of an order for weldedassemblies, AMK Welding performs welding services using customer specificwelding procedures.

 

AMKWelding uses a variety of processes and specialized equipment, includingelectron beam and gas tungsten arc welding processes. AMK Welding hasconsiderable expertise in vacuum chamber welding, which is a criticalcapability when welding titanium, zirconium, high temperature nickel alloys andother specialty alloys. These welding techniques are used for the welding ofblades and vanes and other turbine parts typically located in the hot gas pathof aircraft engines. In addition to its welding capabilities, AMK Welding also usesvarious heat treatment and non-destructive examination processes, such asradiographic inspection, in support of its welding operations.

 

**Suppliers, Competition, Customer Profile, Marketing andResearch and Development**

 

**DMC Clad**

 

*Suppliers and Raw Materials*

 

DMCClad uses a range of alloys, steels and other materials for its operations,such as stainless steel, copper alloys, nickel alloys, titanium, zirconium,tantalum, aluminum and other metals. DMC Clad sources its raw materials from anumber of different producers and suppliers, minimizing its exposure to any oneparticular supplier. DMC Clad holds a limited metal inventory and purchases itsraw materials based on contract specifications. Under most contracts, any rawmaterial price increases are passed on to DMC Clad’s customers. DMC Cladclosely monitors the quality of its supplies and inspects the type, dimensions,markings, and certification of all incoming metals to ensure that the materialswill satisfy applicable construction codes. DMC Clad also manufactures its ownexplosives from standard raw materials, thus achieving higher quality and lowercost.

 

*Competition*

 

*Metal Cladding.*DMC Clad faces competition from alternativetechnologies such as rollbond and weld overlay. Usually the three processes donot compete directly against each other, each having its own preferentialdomain of application relating to metal used and thicknesses required. However,due to specific project considerations such as technical specifications, priceand delivery time, explosion-welding may have the opportunity to competesuccessfully against these technologies. Rollbond is only produced by a fewsteel mills in the world. The weld overlay process, which is produced among themany vessel fabricators who are often also DMC Clad customers, is a slow andlabor intensive process that requires a large amount of floor space for theequipment.

 

*Explosion-Welded Metal Cladding.*Competition in the explosion-welded cladmetal business is fragmented. DMC Clad holds a strong market position in theclad metal industry. DMC Clad is the leading producer of explosion-welded cladproducts in North America, and it has a strong position in Europe againstsmaller competitors. The main competitor in Asia is a division of Asahi Kasei,which has competitive technology and a recognized local brand name. There areseveral explosion-welded clad producers in China, most of whom are technicallylimited and are currently not exporters outside of their domestic market. Toremain competitive, DMC Clad intends to continue developing and providingtechnologically advanced manufacturing services, maintain quality levels, offerflexible delivery schedules, deliver finished products on a reliable basis andcompete favorably on the basis of price.

 

*Customer Profile*

 

DMCClad’s products are used in critical applications in a variety of industries,including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, industrial refrigerationand other similar industries. DMC Clad’s customers in these industries requiremetal products that can withstand exposure to corrosive materials, hightemperatures and high pressures. DMC Clad’s customers can be divided

 

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into three tiers: the product end-users(e.g., operators of chemical processing plants), the engineering contractorswho design plants and equipment for end-users, and the metal fabricators whomanufacture the products or equipment that utilize DMC Clad’s metal products.It is typically the fabricator that places the purchase order with DMC Clad andpays the corresponding invoice. DMC Clad has developed strong relationshipsover the years with the engineering contractors (relatively large companies)who sometimes act as prescriptor to small local fabricators.

 

*Marketing, sales, distribution*

 

DMCClad conducts its selling efforts by marketing its services to potentialcustomers through senior management, direct sales personnel, program managersand independent sales representatives. Prospective customers in specificindustries are identified through networking in the industry, cooperativerelationships with suppliers, public relations, customer references, inquiriesfrom technical articles and seminars and trade shows. DMC Clad markets its cladmetal products to three tiers of customers: product end-users, engineeringcontractors and metal fabricators. DMC Clad’s sales office in the United Statescovers the Americas and Asia, its sales office in France covers SouthernEurope, the Middle East and Africa, while its sales office in Sweden coversNorthern Europe and Germany. In addition, DMC Clad also operates a sales officein India. Members of the global sales team may be called to work on projectslocated outside their territory. By maintaining relationships with its existingcustomers, developing new relationship with prospective customers and educatingall its customers as to the technical benefits of DMC Clad’s metal-workedproducts, DMC Clad endeavors to have its products specified as early aspossible in the design process.

 

Inaddition to its direct sales office, DMC Clad also works with sales agentslocated in Canada, South Africa, the United Kingdom, Germany, Italy, Norway,Finland, Saudi Arabia, Australia, Indonesia, China, Korea and Japan. DMC Cladhas several exclusive or non-exclusive agreements with agents for sales andbusiness promotion in specific territories defined by each agreement. Theseagency contracts cover additional sales in specific European, Middle Easternand Far Eastern countries. Agency agreements are usually one to two years induration and, subject to agents meeting DMC Clad’s performance expectations,are automatically renewed.

 

DMCClad’s sales are generally shipped from the manufacturing locations in the UnitedStates, France and Sweden, and all shipping costs are covered by the customer.Regardless of where the sale is booked (in Europe or the U.S.), DMC Clad willproduce it, capacity permitting, at the location closest to the delivery place.In the event that there is a short term capacity issue, DMC Clad produces theorder at any of its production sites, prioritizing timing. The variousproduction sites allow DMC Clad to meet customer production needs in a timelymanner.

 

*Research and Development*

 

Weprepare a formal research and development plan annually. It is implemented atthe French and at the U.S. cladding sites and is supervised by a TechnicalCommittee, chaired by the Chief Executive Officer, that reviews progressquarterly and meets once a year to establish the plan for the following 12months. The research and development projects concern process support, newproducts and special customer-paid projects.

 

**AMK Welding**

 

AtAMK Welding, the materials welded are a function of the type of parts supplied bythe customers and include many steel varieties, various nickel alloys andcustomer-created proprietary alloys typically used in the aerospace or groundturbines industries. Other than the metal wire used in the welding process, AMKWelding does not purchase metals, and it receives the parts to be welded fromthe customer.

 

AMKWelding relies on a few key customers for the majority of its business,including GE Energy, General Electric Aircraft Engines and their first tiersubcontractors, such as Barnes Aerospace, and divisions of United Technology,such as Hamilton Standard, Sikorsky Aircraft and Pratt and Whitney. Inaddition, AMK Welding has entered into a 5-year contract to provide weldingservices to the GE Energy Business of General Electric Company for up to six HSystem gas turbine engines per year. During the term of this contract, thecustomer has agreed to use AMK Welding for welding services for the first six HSystem gas turbine engines such customer manufactures each year. In theaircraft engine business, AMK Welding competes against a few small weldingcompanies that are typically privately owned. AMK Welding competes successfullybased on a reputation for uncompromising quality and rapid responsiveness tocustomer needs.

 

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**Corporate History & Recent Developments**

 

**Company History**

 

ExplosiveFabricators Inc. (“EFI”) was founded in 1965 and incorporated in 1971 as aColorado corporation. In 1976, EFI became a licensee of Detacladâ, the explosion-weld clad process discovered by DuPont in 1959. EFIbecame a public company in 1977 and was renamed Dynamic Materials Corporationin 1994. In 1996, we purchased the Detaclad operating business from DuPont. Wereincorporated in 1997 as a Delaware corporation. In 1998, we acquired AMKWelding, Spin Forge and Precision Machined Products (“PMP”).

 

Ina series of transactions including open market purchases and a direct purchaseof our common stock pursuant to a stock purchase agreement, SNPE, Inc.(“SNPE”), which is indirectly wholly owned by the government of France,acquired shares of our common stock, resulting by June 30, 2000 in its holding2,763,491 shares of our common stock, or approximately 56% of our outstandingshares of common stock. On June 8, 2005, SNPE exercised its conversion rightson a convertible subordinated note it held, and the note was converted into200,000 shares of our common stock at a conversion rate of $6 per share,increasing SNPE’s ownership to 2,963,491 shares at that time. A subsequentstock split increased this amount to the current 5,926,982 shares held by SNPE.

 

Atthe time of its acquisition of our common stock, SNPE’s parent company, GroupeSNPE, was the indirect owner of Nobelclad, which had been a licensee of theDetacladâ technology in France since 1966, and hadacquired its Swedish competitor, Nitro Clad, in 1997, as well as its U.K. andGerman competitors in 1998. On July 3, 2001, we completed our acquisition ofsubstantially all of the outstanding stock of Nobelclad from Nobel ExplosifsFrance (“NEF”). NEF is wholly owned by Groupe SNPE and is a sister company toSNPE. Nobelclad and its wholly-owned subsidiary, Nitro Metall AB (“NitroMetall”) are the primary manufacturers of explosion-welded clad products inEurope and operate cladding businesses located in Rivesaltes, France andLikenas, Sweden, respectively, along with sales offices in each country.Products manufactured by Nobelclad and Nitro Metall are similar to thoseproduced by DMC Clad’s domestic factory in Mount Braddock, Pennsylvania.

 

Historically,our Aerospace segment was comprised of three companies that we acquired in1998:  AMK Welding, Spin Forge and PMP.Because PMP and Spin Forge were sold in October of 2003 and September of 2004,respectively, and are reported as discontinued operations, AMK Welding hasbecome a stand-alone business segment.

 

**Employees**

 

Asof December 31, 2005, we employed approximately 181 permanent employees themajority of whom were engaged in manufacturing operations, and the remainderwere engaged in sales and marketing or corporate department.

 

Themajority of our manufacturing employees are not unionized. Of the 181 permanentemployees, 109 are U.S. based, 58 are based in France at the Nobelclad facilityand 14 are based in Sweden at Nitro Metall. Approximately half of Nobelclad’semployees and all Nitro Metall employees are members of trade unions. Inaddition, we also use between 15 and 20 temporary workers at any given time,depending on the workload.

 

In2005, approximately half of the employees of the French facility held a strikefor one week, which was the first in 8 years. The strike was resolved and webelieve that employee relations are good.

 

**Insurance**

 

Ouroperations expose us to potential liabilities for personal injury or death as aresult of the failure of a component that has been designed, manufactured orserviced by us, or the irregularity or failure of metal products we haveprocessed or distributed. We believe that we maintain liability insurance adequateto protect us from future product liability claims.

 

**Proprietary Knowledge, Permits and Patents**

 

*Protection of Proprietary Information*. We hold patents related to the business ofexplosive metalworking and metallic processes and also own certain registeredtrademarks, including Detaclad®, Detacouple®, Dynalock®,

 

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EFTEK®, ETJ 2000® and NOBELCLAD®. Althoughthe patents for the explosion-welded cladding process have expired, our currentproduct application patents expire on various dates through 2020. Sinceindividual patents relate to specific product applications and not to coretechnology, we do not believe that such patents are material to our businessand the expiration of any single patent is not expected to have a materialadverse effect on our operations. Much of the manufacturing expertise lies inthe knowledge of the factors that affect the quality of the finished cladproduct, including the types of metals to be explosion-welded, the setting ofthe explosion, the composition of the explosive and the preparation of theplates to be bonded. We have developed this specialized knowledge over our 40years of experience in the explosive metalworking business. We are very carefulin protecting our proprietary know-how and manufacturing expertise, and we haveimplemented measures and procedures to ensure that the information remainsconfidential.

 

*Permits*. Explosive metalworking involves the use of explosives, making safetya critical factor in our operations. In addition, it is a highly regulatedindustry for which detailed permits are required. These permits require renewalevery four years. See “Item 1A – Risk Factors – Risk Factors Related to OurIndustry – We are subject to extensive government regulation and failure tocomply could subject us to future liabilities and could adversely affect ourability to conduct or to expand our business” for a more detailed discussion ofthese permits.

 

**Foreign and Domestic Operations and Export Sales**

 

Allof our sales are shipped from the manufacturing facilities located in theUnited States, France and Sweden. The following chart represents our net salesbased on the geographic location of the customer. The sales recorded for eachcountry are based on the country to which we shipped the product, regardless ofthe country of the actual end-user. Products are usually shipped to thefabricator before being passed on to the end-user.

 
| ** **               | ** ** | **(Dollars in Thousands)**           | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **For the years ended December 31,** | ** ** |
| ** **               | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| United  States           |       | $                                    | 32,126     |   | $ | 24,528 |   | $ | 17,879 |   |
| South Korea              |       | 7,771                                |       | 409 |   | 829 |   |
| Canada                   |       | 7,562                                |       | 4,924 |   | 4,610 |   |
| Spain                    |       | 5,369                                |       | 957 |   | 587 |   |
| Malaysia                 |       | 5,148                                |       | 83 |   | 40 |   |
| China                    |       | 3,368                                |       | 310 |   | 33 |   |
| Netherlands              |       | 2,757                                |       | 1,218 |   | 749 |   |
| Belgium                  |       | 2,495                                |       | 2,591 |   | 795 |   |
| France                   |       | 2,417                                |       | 1,662 |   | 1,424 |   |
| Italy                    |       | 2,208                                |       | 2,236 |   | 1,617 |   |
| Australia                |       | 1,940                                |       | 5,454 |   | 1,768 |   |
| Germany                  |       | 939                                  |       | 1,978 |   | 550 |   |
| Russia                   |       | 838                                  |       | 253 |   | 1,488 |   |
| Mexico                   |       | 664                                  |       | 1,241 |   | 570 |   |
| Other  foreign countries |       | 3,689                                |       | 6,321 |   | 2,840 |   |
|                     |       |                                 |       |   |   |   |   |
| Total                    |       | $                                    | 79,291     |   | $ | 54,165 |   | $ | 35,779 |   |

 

**CompanyInformation**

 

OurInternet address is www.dynamicmaterials.com. Information contained on ourwebsite does not constitute part of this Annual Report on Form 10-K.

 

10

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**ITEM**1A**.       Risk Factors**

 

***Risk Factors Related to Our Industry***

** **

**Despite substantial growth in recent years in our existingmarkets, growth in such markets may not continue at the same rate indefinitely.**

** **

From2003 to 2004 and from 2004 to 2005, sales by DMC Clad increased by 55% and 47%,respectively. However, the explosion-weld cladding market is dependent uponsales of products for use by customers in a limited number of heavy industries,including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation and industrialrefrigeration.  These industries tend tobe cyclical in nature, and there can be no assurance that the construction andother needs of those industries for our products will continue to grow atcurrent rates.  An economic slowdown inone or all of these industries, whether due to cyclicality or other factors,could impact capital expenditures within the industry.  If demand from such industries were todecline or even grow less quickly, our sales would be expected to be affectedproportionately, which may have a material adverse effect on our business,financial condition and results of operations.

 

**There is a limited availability of sites suitable forcladding operations.**

** **

Ourcladding process involves the detonation of large amounts of explosives. As aresult, the sites where we perform cladding must meet certain criteria,including lack of proximity to a densely populated area, the specificgeological characteristics of the site, and the ability to comply with localnoise and vibration abatement regulations in conducting the process. Theprocess of identifying suitable sites and obtaining permits for using the sitesfrom local government agencies can be time-consuming and may not be successful.In addition, we could experience difficulty in obtaining or renewing permitsbecause of resistance from residents in the vicinity of proposed sites. The failure to obtain required governmental approvals or permits could limit ourability to expand our cladding business in the future, and the failure tomaintain such permits would have a material adverse effect on our business,financial condition and results of operations.

 

**Certain raw materials we use are subject to supply shortagesdue to general economic conditions.**

** **

Althoughwe generally use standard metals and other materials in manufacturing ourproducts, certain materials such as specific grades of carbon steel, titanium,zirconium and nickel can be subject to supply shortages due to general economicconditions or problems with individual suppliers. While we seek to maintainsufficient alternative supply sources for these materials, there can be noassurance that we will always be able to obtain sufficient supplies or obtainsupplies at acceptable prices without production delays, additional costs or aloss of product quality. If we were to fail to obtain sufficient supplies on atimely basis or at acceptable prices, such loss or failure could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Certain raw materials we use are subject to price increasesdue to general economic conditions.**

** **

Themarkets for certain metals and other raw materials used in our business arehighly variable and are characterized by periods of increasing prices. Wegenerally do not hedge commodity prices or enter into forward supply contracts,and instead we endeavor to pass along price variations to our customers. We maysee a general downturn in business if the price of raw materials increasesenough for our customers to delay planned projects or use alternative materialsto complete their projects.

 

11

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**We are subject to extensive government regulation and failureto comply could subject us to future liabilities and could adversely affect ourability to conduct or to expand our business.**

** **

Weare subject to extensive government regulation in the United States, France andSweden, including guidelines and regulations for the safe manufacture,handling, transport and storage of explosives provided by the U.S. Bureau ofAlcohol, Tobacco and Firearms, the Federal Motor Carrier Safety Regulations setforth by the U.S. Department of Transportation and the Safety LibraryPublications of the Institute of Makers of Explosive and similar guidelines oftheir European counterparts.  In Sweden,the purchase, transport, storage and use of explosives is governed by a permitissued by the Police Authority of the County of Varmland.  (In France, the manufacture andtransportation of explosives is subcontracted to Nobel Explosifs France, anaffiliate of SNPE, which is responsible for compliance with regulationsestablished by various State and local governmental agencies concerning thehandling and transportation of explosives.) We must comply with licensing and regulations for the purchase,transport, storage, manufacture, handling and use of explosives. In addition,while our shooting facilities in France and Sweden are located outdoors, our shootingfacility in Pennsylvania is located in a mine, which subjects us to certainregulations and oversight of governmental agencies that oversee mines.

 

Weare also subject to extensive environmental and occupational safety regulation,as described below under “ – Liabilities under environmental and safety lawscould result in restrictions or prohibitions on our facilities, substantialcivil or criminal liabilities, as well as the assessment of strict liabilityand/or joint and several liability” and “ – The use of explosives subjects usto additional regulation, and any accidents or injuries could subject us tosignificant liabilities.”

 

Theexport of certain products from the United States is restricted by U.S. exportregulations.  These regulations generallyprevent the export of products that could be used by certain end-users, such asthose in the nuclear or biochemical industries. In addition, the use and handling of explosives may be subject to increasedregulation due to heightened concerns about security and terrorism. Suchregulations could restrict our ability to access and use explosives andincrease costs associated with the use of such explosives, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Anyfailure to comply with current and future regulations in the U.S. and Europecould subject us to future liabilities. In addition, such regulations couldrestrict our ability to expand our facilities, construct new facilities, competein certain markets or could require us to incur other significant expenses inorder to maintain compliance. Accordingly, our business, results of operationsor financial condition could be adversely affected by our non-compliance withapplicable regulations, by any significant limitations on our business as aresult of our inability to comply with applicable regulations, or by anyrequirement that we spend substantial amounts of capital to comply with suchregulations.

 

**Liabilities under environmentaland safety laws could result in restrictions or prohibitions on our facilities,substantial civil or criminal liabilities, as well as the assessment of strictliability and/or joint and several liability.**

 

Weare subject to extensive environmental and safety regulation in the UnitedStates and Europe. Any failure to comply with current and future environmental andsafety regulations could subject us to significant liabilities. In particular,any failure to control the discharge of hazardous materials and wastes couldsubject us to significant liabilities, which could adversely affect ourbusiness, results of operations or financial condition.

 

Weand all our activities in the United States are subject to federal, state andlocal environmental and safety laws and regulations, including but not limitedto, noise abatement and air emissions regulations, the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980, regulationsissued and laws enforced by the labor and employment departments of the U.S.and the states in which we conduct business, the U.S. Department of Commerce,the U.S. Environmental Protection Agency and by state and county health andsafety agencies. In France, we and all our activities are subject to stateenvironmental and safety regulations established by various departments of theFrench Government, including the Ministry of Labor, the Ministry of Ecology andthe Ministry of Industry, and to local environmental and safety regulations andadministrative procedures established by DRIRE (Direction Régionale del’Industrie, de la Recherche et de l’Environnement) and the Préfecture desPyrénées Orientales.  In Sweden, we andall our activities are subject to various safety and environmental regulations,including those established by the Work Environment Authority of Sweden in itsWork Environment Act.  In addition, ourshooting operations in France and Sweden may be particularly vulnerable tonoise abatement regulations because these operations are primarily conductedoutdoors. 

 

Changesin, or compliance with, environmental and safety regulations could inhibit orinterrupt our operations, or require modifications to our facilities. Anyactual or alleged violations of environmental and safety laws could result inrestrictions or prohibitions on our facilities, substantial civil or criminalsanctions, as well as the assessment of strict liability and/or joint andseveral liability under applicable law. Under certain environmental laws, we could be held responsible for allof the costs relating to any contamination at our or our predecessor’s past orpresent facilities and at third party waste disposal sites.  We could also be held liable for any and allconsequences arising out of human exposure to hazardous substances or otherenvironmental damage.  Accordingly,environmental, health or safety matters may result in significant unanticipatedcosts or liabilities.

 

**The use of explosives subjects us to additional regulation,and any accidents or injuries could subject us to significant liabilities.**

** **

Ouroperations involve the detonation of large amounts of explosives.  As a result, we are required to use specificsafety precautions under U.S. Occupational Safety and Health Administrationguidelines and guidelines of similar entities in France and Sweden.  These include precautions which must be takento protect employees from exposure to sound and ground vibration or fallingdebris associated with the detonation of explosives.  There is a risk that an accident or deathcould occur in one of our facilities. Any accident could result in significant manufacturing delays,disruption of operations or claims for damages resulting from death orinjuries, which could result in decreased sales and increased expenses. Todate, we have not incurred any significant delays, disruptions or claimsresulting from accidents at our facilities. The potential liability resulting from any accident or death, to theextent not covered by insurance, may require us to use other funds to satisfyour obligations and could cause our business to suffer.  See “ – Our use of explosives is aninherently dangerous activity that could lead to temporary or permanent closureof our shooting sites” below.

 

12

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**Our use of explosives is aninherently dangerous activity that could lead to temporary or permanent closureof our shooting sites.**

 

Weuse a large amount of explosives in connection with the creation of clad metalsand the shock synthesis of diamonds.  Theuse of explosives is an inherently dangerous activity.  Explosions, even if occurring as intended,can lead to damage to the shooting facility or to equipment used at thefacility or injury to persons at the facility. If a person were injured orkilled in connection with such explosives, or if equipment at the mine oreither of the outdoor locations were damaged or destroyed, we might be requiredto suspend our operations for a period of time while an investigation isundertaken or repairs are made.  Such adelay might impact our ability to meet the demand for our products.  In addition, if the mine were seriouslydamaged, we might not be able to locate a suitable replacement site to continueour operations.

 

Themanufacture of industrial grade diamonds utilizing explosive shock synthesisrequires the use of a large quantity of explosives.  Although this activity only representsapproximately 1% of revenues, we are required to provide this service pursuantto a contractual relationship with the landlord of our shooting site in Dunbar,Pennsylvania.  While the production ofdiamonds increases the risk of damage to the mine, we are required to continuethis activity, despite its low contribution to revenues.

 

***Risk Factors Related to Dynamic MaterialsCorporation***

** **

**Our operating results fluctuate from quarter to quarter.**

** **

Wehave experienced, and expect to continue to experience, fluctuations in annualand quarterly operating results caused by various factors, including the timingand size of orders by major customers, customer inventory levels, shifts inproduct mix, acquisitions and divestitures, and general economicconditions.  The upstream oil and gas, oil refinery, petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration and other diversified industries to which we sell ourproducts are, to varying degrees, cyclical and tend to decline in response tooverall declines in industrial production. As a result, our business is alsocyclical, and the demand for our products by these customers depends, in part,on overall levels of industrial production. Any future material weakness indemand in any of these industries could materially reduce our revenues andprofitability. In addition, the threat of terrorism and other geopoliticaluncertainty could have a negative impact on the global economy, the industrieswe serve and our operating results.

 

Wetypically do not obtain long-term volume purchase contracts from our customers.Quarterly sales and operating results, therefore, depend on the volume andtiming of backlogs as well as bookings received during the quarter. Significantportions of our operating expenses are fixed, and planned expenditures arebased primarily on sales forecasts and product development programs. If salesdo not meet our expectations in any given period, the adverse impact onoperating results may be magnified by our inability to adjust operatingexpenses sufficiently or quickly enough to compensate for such a shortfall.Results of operations in any period should not be considered indicative of theresults to be expected for any future period. Fluctuations in operating resultsmay also result in fluctuations in the price of our common stock. See“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**Customershave the right to change orders until products are completed.**

 

Customers havethe right to change orders after they have been placed.  If orders are changed, the extra expensesassociated with the change will be passed on to the customer.  However, because a change in an order maydelay completion of the project, recognition of income for the project may alsobe delayed.

 

**There is no assurance that we will continue to competesuccessfully against other clad and welding companies.**

** **

Ourexplosion-welded clad products compete with explosion-welded clad products madeby other manufacturers in the clad metal business located throughout the worldand with clad products manufactured using other technologies. Our combinedNorth American and European operations typically supply explosion-welded cladto the worldwide market. There is one other well-known explosion-welded cladsupplier worldwide, a division of Asahi-Kasei Corporation of Japan. There arealso a number of smaller companies worldwide with explosion-welded cladmanufacturing capability, including several companies in China. There arecurrently no other significant North American based explosion-welded cladsuppliers. We focus strongly on reliability, product quality, on-time deliveryperformance, and low cost manufacturing to minimize the potential of futurecompetitive threats. However, there is no guarantee we will be able to maintainour competitive position.

 

Explosion-weldedclad products also compete with those manufactured by rollbond and weld overlaycladding processes. In rollbond technology, the clad and base metal are bondedtogether during a hot rolling process in which slab is converted to plate. Inweld overlay, which is typically performed by our fabricator customers, thecladding layer is deposited on the base metal through a fusion welding process.The technical and commercial niches of each cladding

 

13

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process are well understood within theindustry and vary from one world market location to another. Our productscompete with weld overlay clad products manufactured by a significant number ofour fabricator customers.

 

AMKWelding competes principally with other domestic companies that provide weldingservices to the aircraft engine and power generation industries. Some of thesecompetitors have established positions in the market and long standingrelationships with customers. To remain competitive, we must continue todevelop and provide technologically advanced welding, heat-treat and inspectionservices, maintain quality levels, offer flexible delivery schedules, andcompete favorably on the basis of price. We compete against other weldingcompanies on the basis of quality, performance and cost. There can be noassurance that we will continue to compete successfully against thesecompanies.

 

**We are dependent on a relatively small number of customersfor a significant portion of our net sales.**

** **

Asignificant portion of our net sales is derived from a relatively small numberof customers. We expect to continue to depend upon our principal customers fora significant portion of our sales, although there can be no assurance that ourprincipal customers will continue to purchase products and services from us at currentlevels, if at all. The loss of one or more major customers or a change in theirbuying patterns could have a material adverse effect on our business, financialcondition and results of operations. In past years, the majority of DMC Clad’srevenues have been derived from customers in the upstream oil and gas, oilrefinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding,power generation and industrial refrigeration industries and the majority ofAMK Welding’s revenues have been derived from customers in the aircraft engineand power generation industries. Economic downturns in these industries couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

AMKWelding, which contributes approximately 5% to our total sales, continues torely primarily on one customer for the majority of its sales. This customer andAMK Welding have entered into a long-term supply agreement for certain of theservices provided to this customer. Any termination of or significant reductionin AMK Welding’s business relationship with this customer could have a materialadverse effect on AMK Welding’s business and financial condition.

 

**Failure to attract and retain key personnel could adverselyaffect our current operations.**

** **

Ourcontinued success depends to a large extent upon the efforts and abilities ofkey managerial and technical employees. The loss of services of certain ofthese key personnel could have a material adverse effect on our business,results of operations and financial condition. There can be no assurance thatwe will be able to attract and retain such individuals on acceptable terms, ifat all, and the failure to do so could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**Work stoppages and other labor relations matters may make itsubstantially more difficult or expensive for us to produce our products, whichcould result in decreased sales or increased costs, either of which wouldnegatively impact our financial condition and results of operations.**

** **

Weare subject to the risk of work stoppages and other labor relations matters,particularly in France and Sweden, where some of our employees are unionized.The employees at our U.S. facility, where the majority of products aremanufactured, are not unionized. While we believe our relations with employeesare satisfactory, any prolonged work stoppage or strike at any one of ourprincipal facilities could have a negative impact on our business, financialcondition or results of operations. We most recently experienced a one-weekwork stoppage in 2005 at our facility in France. This strike did not materiallyimpact operations, but we cannot assure you that a work stoppage at one or moreof our facilities will not materially impair our ability to operate ourbusiness in the future.

 

**The unsuccessful integration of a business we acquire couldhave a material adverse effect on operating results.**

** **

Wecontinue to consider possible acquisitions as part of our growth strategy. Anypotential acquisition may require additional debt or equity financing,resulting in additional leverage and dilution to existing stockholders. We

 

14

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cannot assure you that any future acquisitionwill be consummated, or that if consummated that we will be able to integratesuch acquisition successfully without a material adverse effect on ourfinancial condition or results of operations.

 

**SNPE has a significant influenceon our company and could take actions that may not be consistent with thedesires of other stockholders.**

 

Asof December 31, 2005, SNPE, Inc., an affiliate of Groupe SNPE of France,controlled more than 50% of our outstanding common stock.  SNPE has significant influence over our managementand affairs and matters requiring stockholder approval, including the electionof directors and approval of significant corporate transactions.  This concentration of power may have theeffect of actions being taken or not taken according to the desires of SNPE.

 

**SNPE has indicated that it isexploring the sale of our common stock.**

 

OnFebruary 28, 2006, SNPE filed a Schedule 13D/A with the Securities and ExchangeCommission in which it stated that it was exploring the sale of up to all ofits shares of our common stock in an underwritten secondary offering, and thatit was evaluating the opportunity and has engaged in discussions with us andpotential underwriters in connection with such a sale.  SNPE further disclosed that it intended torelinquish control over us and fully liquidate its equity interest inconnection with such an offering.  Whilethere can be no assurance that such a sale will occur, sales of substantialamounts of our common stock in the open market, or the perception that those salescould occur, could adversely affect prevailing market prices for our commonstock and could impair our ability to raise capital in the future through thesale of our equity securities.

 

**ITEM**1B**.       Unresolved Staff Comments**

 

None.

 

15

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**ITEM**2**.          Properties**

 

Ourcorporate headquarters are located in Boulder, Colorado. The lease for theoffice space is currently set to expire on February 28, 2010, with renewaloptions through February 28, 2016.

 

Weown our principal domestic manufacturing site, which is located in MountBraddock, Pennsylvania. We currently lease our only domestic shooting site,which is located in Dunbar, Pennsylvania. The shooting site in DunbarPennsylvania supports our manufacturing facility in Mount Braddock,Pennsylvania. The lease for the Dunbar property will expire on December 15,2010, but we have options to renew the lease that extend through December 15,2029. Our French subsidiary, Nobelclad, owns the land and the buildings housingits operations in Rivesaltes, France and Tautavel, France (except for a smallportion in Tautavel that is leased). This lease expires on December 31, 2011and may be extended. Our Swedish subsidiary, Nitro Metall, owns the land andbuildings housing its manufacturing operations in Likenas, Sweden. Both thebuildings and the land housing the Nitro Metall shooting site and sales officein Likenas, Sweden and Filipstad, Sweden, respectively, are leased. The leasesin Filipstad are automatically renewed every year. The sites in Pennsylvania,France and Sweden are part of the Explosive Metalworking segment. In addition,we own the land and buildings housing the operations of AMK Welding in SouthWindsor, Connecticut.

 
| **Location**                | ** ** | **Facility Type**                                                                  | ** ** | **Facility Size** | ** ** | **Owned/Leased**                  | ** ** | **Expiration Date of Lease  (if applicable)**                      |
|-----------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------|
| Boulder,  Colorado          |       | Corporate  and Sales Office                                                        |       | 9,140  sq. ft.    |       | Leased                            |       | February  28, 2010, with renewal options through February 28, 2016 |
| Mt.  Braddock, Pennsylvania |       | Clad  Plate Manufacturing                                                          |       | 48,000  sq. ft.   |       | Owned                             |       |                                                               |
| Dunbar,  Pennsylvania       |       | Clad  Plate Shooting Site                                                          |       | 322  acres        |       | Leased                            |       | December  15, 2010, with renewal options through December 15, 2029 |
| Rivesaltes,  France         |       | Clad  Plate Manufacturing,  Nobelclad Europe  Sales and Administration Office |       | 53,000  sq. ft.   |       | Owned                             |       |                                                               |
| Tautavel,  France           |       | Clad  Shooting Site                                                                |       | 114  acres        |       | 107  acres owned,  7 acres leased |       | December  31, 2011                                                 |
| Likenas,  Sweden            |       | Clad  Plate Manufacturing                                                          |       | 26,000  sq. ft.   |       | Owned                             |       |                                                               |
| Likenas,  Sweden            |       | Clad  Plate Shooting Site                                                          |       | 15  acres         |       | Leased                            |       | January  1, 2016                                                   |
| Filipstad,  Sweden          |       | Nitro  Metall Sales Office                                                         |       | 850  sq. ft.      |       | Leased                            |       | January  1, 2007 (renews annually)                                 |
| South  Windsor, Connecticut |       | AMK  Welding                                                                       |       | 21,000  sq. ft.   |       | Owned                             |       |                                                               |

 

16

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**ITEM**3**.          Legal Proceedings**

 

Althoughwe may in the future become a party to litigation, there are no pending legalproceedings against us.

 

**ITEM**4**.          Submission of Matters to a Vote ofSecurity Holders**

 

Nomatters were submitted to security holders for vote during the fourth quarterof the fiscal year ended December 31, 2005.

 

17

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**PART II**

 

**ITEM**5**.   Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

Ourcommon stock is publicly traded on The Nasdaq Capital Market (“Nasdaq”) underthe symbol “BOOM.”  The following tablesets forth quarterly high and low bid quotations for the common stock duringour last two fiscal years, as reported by Nasdaq, adjusted to give effect tothe 2-for-1 stock split effective October 13, 2005. The quotations reflectinter-dealer prices, without retail mark-up, mark-down or commission, and maynot represent actual transactions.

 

| ** **                            | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|
| **2006**                              |       |     |       |    |       |
|                                  |       |     |       |    |       |
| January 1,  2006 to February 28, 2006 |       | $        | 38.44      |    | $          | 27.01 |   |
|                                  |       |     |       |    |       |
| **2005**                              |       |     |       |    |       |
|                                  |       |     |       |    |       |
| First  Quarter                        |       | $        | 19.48      |    | $          | 4.31 |   |
| Second  Quarter                       |       | $        | 22.59      |    | $          | 10.99 |   |
| Third  Quarter                        |       | $        | 26.25      |    | $          | 17.20 |   |
| Fourth  Quarter                       |       | $        | 32.56      |    | $          | 18.25 |   |
|                                  |       |     |       |    |       |
| **2004**                              |       |     |       |    |       |
|                                  |       |     |       |    |       |
| First  Quarter                        |       | $        | 1.77       |    | $          | 1.40 |   |
| Second Quarter                        |       | $        | 2.00       |    | $          | 1.36 |   |
| Third  Quarter                        |       | $        | 1.89       |    | $          | 1.29 |   |
| Fourth  Quarter                       |       | $        | 8.78       |    | $          | 1.35 |   |

 

Asof February 28, 2006, there were approximately 345 holders of record of our commonstock.

 

Wedid not declare dividends in 2004. We declared and paid a $0.10 per sharedividend in 2005. On February 23, 2006, we declared a dividend of $0.15 pershare of common stock payable on March 22, 2006 to stockholders of record onMarch 10, 2006. We may pay annual dividends subject to capital availability andperiodic determinations that cash dividends are in the best interests of ourstockholders, but we cannot assure you that such payments will continue. Futuredividends may be affected by, among other items, our views on potential futurecapital requirements, future business prospects, changes in federal income taxlaw and any other factors that our Board of Directors deems relevant. Anydetermination to pay cash dividends will be at the discretion of the Board ofDirectors.

 

18

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**ITEM** 6.          **Selected Financial Data**

 

Thefollowing selected financial data should be read in conjunction with theConsolidated Financial Statements, including the related Notes, and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

(Dollars in Thousands, Except Per Share Data)

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Statement  of Operations**                                                       |       |                        |       |   |   |   |   |   |   |   |   |
| Net sales                                                                          |       | $                           | 79,291     |   | $ | 54,165 |   | $ | 35,779 |   | $ | 38,880 |   | $ | 32,073 |   |
| Cost of  products sold                                                             |       | 55,856                      |       | 40,559 |   | 26,802 |   | 26,673 |   | 22,474 |   |
| Gross profit                                                                       |       | 23,435                      |       | 13,606 |   | 8,977 |   | 12,207 |   | 9,599 |   |
| Cost and  expenses                                                                 |       | 7,667                       |       | 6,718 |   | 5,661 |   | 5,011 |   | 4,736 |   |
| Income from  operations                                                            |       | 15,768                      |       | 6,888 |   | 3,316 |   | 7,196 |   | 4,863 |   |
| Other  expense, net                                                                |       | 163                         |       | 524 |   | 527 |   | 742 |   | 849 |   |
| Income  before income taxes                                                        |       | 15,605                      |       | 6,364 |   | 2,789 |   | 6,454 |   | 4,014 |   |
| Income tax  provision                                                              |       | 5,233                       |       | 1,961 |   | 1,504 |   | 2,528 |   | 723 |   |
| Income from  continuing operations                                                 |       | 10,372                      |       | 4,403 |   | 1,285 |   | 3,926 |   | 3,291 |   |
| Discontinued operations, net of tax                                                |       | —                      |       | (1,570 | ) | (1,993 | ) | (1,437 | ) | (503 | ) |
| Cumulative effect of change in accounting  principle, net of tax benefit of $1,482 |       | —                      |       | — |   | — |   | (2,318 | ) | — |   |
| Net income  (loss)                                                                 |       | $                           | 10,372     |   | $ | 2,833 |   | $ | (708 | ) | $ | 171 |   | $ | 2,788 |   |
|                                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations per share:                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | $                           | 0.92       |   | $ | 0.43 |   | $ | 0.13 |   | $ | 0.39 |   | $ | 0.33 |   |
| Diluted                                                                            |       | $                           | 0.86       |   | $ | 0.41 |   | $ | 0.13 |   | $ | 0.38 |   | $ | 0.32 |   |
| Net income  (loss) per share:                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | $                           | 0.92       |   | $ | 0.28 |   | $ | (0.07 | ) | $ | 0.02 |   | $ | 0.28 |   |
| Diluted                                                                            |       | $                           | 0.86       |   | $ | 0.27 |   | $ | (0.06 | ) | $ | 0.02 |   | $ | 0.27 |   |
| Weighted  average number of shares outstanding:                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | 11,290,053                  |       | 10,269,080 |   | 10,134,648 |   | 10,084,764 |   | 10,006,798 |   |
| Diluted                                                                            |       | 12,086,884                  |       | 10,968,090 |   | 10,621,612 |   | 10,574,102 |   | 10,502,446 |   |
|                                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| DIVIDENDS DECLARED PER COMMON SHARE                                                |       | $                           | 0.10       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| **Financial  Position**                                                            |       |                        |       |   |   |   |   |   |   |   |   |
| Current  assets                                                                    |       | $                           | 36,552     |   | $ | 26,246 |   | $ | 14,911 |   | $ | 15,237 |   | $ | 14,558 |   |
| Total assets                                                                       |       | 55,311                      |       | 43,753 |   | 35,262 |   | 33,698 |   | 36,913 |   |
| Current  liabilities                                                               |       | 14,838                      |       | 16,962 |   | 10,114 |   | 8,382 |   | 8,061 |   |
| Non-current  liabilities                                                           |       | 5,518                       |       | 6,721 |   | 9,564 |   | 9,753 |   | 14,207 |   |
| Stockholders’  equity                                                         |       | 34,955                      |       | 20,070 |   | 15,584 |   | 15,563 |   | 14,646 |   |

 

19

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Selectedunaudited quarterly financial data for the years ended December 31, 2005 and2004 is presented below:

 

(Dollars in Thousands, Except Per Share Data)

 
| ** **                                             | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **Quarter ended**                | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** |
| ** **                                             | ** ** | **March 31,**                    | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                              |       | $                                | 17,510     |   | $ | 18,376 |   | $ | 20,238 |   | $ | 23,167 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Gross profit                                           |       | $                                | 4,650      |   | $ | 5,215 |   | $ | 6,268 |   | $ | 7,302 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Income from  continuing operations                     |       | $                                | 1,648      |   | $ | 2,115 |   | $ | 3,152 |   | $ | 3,457 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Net income                                             |       | $                                | 1,648      |   | $ | 2,115 |   | $ | 3,152 |   | $ | 3,457 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Income from  continuing operations per share - basic   |       | $                                | 0.15       |   | $ | 0.19 |   | $ | 0.27 |   | $ | 0.29 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Income from  continuing operations per share - diluted |       | $                                | 0.14       |   | $ | 0.18 |   | $ | 0.26 |   | $ | 0.28 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Net income  per share - basic                          |       | $                                | 0.15       |   | $ | 0.19 |   | $ | 0.27 |   | $ | 0.29 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Net income  per share - diluted                        |       | $                                | 0.14       |   | $ | 0.18 |   | $ | 0.26 |   | $ | 0.28 |   |

 
| ** **                                             | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **Quarter ended**                | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** |
| ** **                                             | ** ** | **March 31,**                    | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                              |       | $                                | 10,160     |   | $ | 11,985 |   | $ | 12,070 |   | $ | 19,950 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Gross profit                                           |       | $                                | 2,265      |   | $ | 2,837 |   | $ | 3,250 |   | $ | 5,254 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Income from  continuing operations                     |       | $                                | 406        |   | $ | 563 |   | $ | 1,136 |   | $ | 2,298 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Net income  (loss)                                     |       | $                                | 208        |   | $ | (507 | ) | $ | 834 |   | $ | 2,298 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Income from  continuing operations per share - basic   |       | $                                | 0.04       |   | $ | 0.06 |   | $ | 0.11 |   | $ | 0.22 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Income from  continuing operations per share - diluted |       | $                                | 0.04       |   | $ | 0.05 |   | $ | 0.11 |   | $ | 0.20 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Net income  (loss) per share - basic                   |       | $                                | 0.02       |   | $ | (0.05 | ) | $ | 0.08 |   | $ | 0.22 |   |
|                                                   |       |                             |       |   |   |   |   |   |   |
| Net income  (loss) per share - diluted                 |       | $                                | 0.02       |   | $ | (0.05 | ) | $ | 0.08 |   | $ | 0.20 |   |

 

Thetotal net income (loss) per share for the 2005 and 2004 quarters do not equalnet income (loss) per share for the respective years as the per share amountsfor each quarter and for each year are computed based on their respectivediscrete periods.

 

20

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**ITEM**7. **Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with our historical consolidatedfinancial statements and notes, as well as the selected historical consolidatedfinancial data included elsewhere in this annual report.

 

Unless stated otherwise, all dollar figures in thisdiscussion are presented in thousands (000’s)*.*

 

**Executive Overview**

 

Ourbusiness is organized into two segments: Explosive Metalworking (which we also refer to as DMC Clad) and AMKWelding. In 2005, Explosive Metalworking accounted for more than 95% of our netsales and income from operations of continuing operations. In 2004 and 2003,Explosive Metalworking accounted for more than 94% and 92%, respectively, ofour net sales, and more than 95% and 86%, respectively, of income from operationsof continuing operations.

 

Our2005 net sales increased 46.4% compared to 2004, reflecting ExplosiveMetalworking year-to-year net sales increases in our U.S.-based and Europeanoperations of 41.2% and 60.2%, respectively. Our income from operations of continuingoperations increased 128.9%, to $15,768 in 2005 from $6,888 in 2004, reflectingan $8,551 improvement in Explosive Metalworking’s operating income and a $329improvement in AMK Welding’s operating income. Income from continuingoperations before discontinued operations increased 135.6%, to $10,372 in 2005from $4,403 in 2004. Our net income increased more than three-fold, to $10,372in 2005 from $2,833 in 2004. Our 2004 net income included a loss fromdiscontinued operations of $1,570 relating to the divestiture of the Spin Forgedivision that we completed in September 2004.

 

*Net sales*

 

ExplosiveMetalworking’s net sales are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tofabricator customers that fabricate industrial equipment for various industries,including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, industrial refrigerationand similar industries. Historically, with the exception of the large nickelhydrometallurgy project orders that we receive periodically, U.S. demand forour clad metal products has been largely driven by plant maintenance andretrofit projects at existing chemical processing, petrochemical processing andoil refining facilities. However, during 2005, we saw an increase in U.S. orderinquiries relating to new plants and large plant expansion projects in the U.S.and other parts of the world. In contrast to the U.S. market, historical demandfor our clad products in Europe and Asia has been more dependent on largeprojects, such as the building of new PTA plants in different parts of theworld, including China, and on sales of electrical transition joints that areused in the aluminum smelting industry.

 

AMKWelding’s net sales are generated from welding, heat treat and inspectionservices that are provided with respect to customer-supplied parts forcustomers primarily involved in the power generation industry and aircraftengine markets.

 

Asignificant portion of our net sales is derived from a relatively small numberof customers; therefore, the failure to complete existing contracts on a timelybasis, and to receive payment for such services in a timely manner, or to enterinto future contracts at projected volumes and profitability levels could adverselyaffect our ability to meet cash requirements exclusively through operatingactivities. We attempt to minimize the risk of losing customers or specificcontracts by continually improving product quality, delivering product on timeand competing favorably on the basis of price.

 

DMCClad’s business is cyclical since it is linked to its customers’ end-marketactivity. The construction cycle for new manufacturing capacity in the chemicalindustry has historically been quite pronounced. It is driven both by worldeconomic demand growth and capacity utilization. As capacity starts to becometight for various chemicals and prices begin to rise, new manufacturingcapacity is added in relatively large incremental amounts. Excess capacitydrives prices down and capacity utilization drops. This has historically been aseven- to ten-year cycle.

 

21

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*Gross profit and cost of products sold*

 

Costof products sold for Explosive Metalworking include the cost of metals andalloys used to manufacture clad metal plates, the cost of explosives, employeecompensation and benefits, freight, outside processing costs, depreciation ofmanufacturing facilities and equipment, manufacturing supplies and othermanufacturing overhead expenses.

 

AMKWelding’s cost of products sold consists principally of employee compensationand benefits, welding supplies (wire and gas), depreciation of manufacturingfacilities and equipment, outside services and other manufacturing overheadexpenses.

 

*Discontinued operations*

 

InOctober 2003, we completed the sale of our PMP division, and in September 2004,we completed the sale of our Spin Forge division. The loss from thediscontinued operations of PMP and Spin Forge decreased from $1,993 in 2003 to$1,570 in 2004, with the 2004 loss including a net of tax loss of $787 from theSpin Forge sale and the 2003 loss including a net of tax loss of $710 from thesale of PMP. Discontinued operations included net of tax operating losses of$783 in 2004 and $1,283 in 2003, with the entire 2004 amount relating to SpinForge and the 2003 amount including net of tax operating losses from both SpinForge and PMP in the amounts of $696 and $587, respectively.

 

*Income taxes*

 

Oureffective income tax rate increased to 33.5% in 2005 from 30.8% in 2004. Incometax provisions on the 2005 and 2004 earnings of Nobelclad and Nitro Metall havebeen provided based upon the respective French and Swedish statutory tax rates.We expect that our future effective tax rates will be higher than thoseexperienced in 2005 and 2004 as a result of the recognition of U.S. taxbenefits relating to research and development tax credits, extraterritorialincome exclusions and foreign tax credits in 2005 and 2004. Going forward,based upon existing tax regulations and current Federal, state and foreignstatutory tax rates, we expect our effective tax rate on our consolidatedpre-tax income to range between 36% and 38%.

 

**Year ended December 31, 2005 compared to Year EndedDecember 31, 2004**

 

*Net sales*

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Net sales  |       | $        | 79,291     |     | $          | 54,165     |       | $                      | 25,126     |   | 46.4 | % |
|            |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Netsales for 2005 increased 46.4% to $79,291 from $54,165 in 2004. ExplosiveMetalworking sales increased 47.1% to $75,582 in 2005 (95% of total sales) from$51,375 in 2004 (95% of total sales). The Explosive Metalworking sales increasereflects a 41.2% increase in sales by our U.S.-based operations and a 60.2%U.S. dollar sales increase at Nobelclad Europe. The year-to-year increase inworldwide Explosive Metalworking sales is principally attributable to theimproved economic condition of the industries that this business segmentserves.

 

AMKWelding contributed $3,709 to 2005 sales (5% of total sales) versus sales of$2,790 in 2004 (5% of total sales).

 

*Gross profit*

 
| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Gross profit             |       | $        | 23,435     |     | $          | 13,606     |       | $                      | 9,829      |   | 72.2 | % |
| Percentage  of net sales |       | 29.6     | %          | 25.1     | %          |       |       |                   |       |
|                          |            |          |            |          |            |            |            |                        |            |  |  |  |

 

22

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Grossprofit increased by 72.2% to $23,435 in 2005 from $13,606 in 2004. Our 2005consolidated gross profit margin rate increased to 29.6% from 25.1% in 2004.The gross profit margin for Explosive Metalworking increased from 25.4% in 2004to 29.8% in 2005 and the gross profit margin for AMK Welding increased to 25.2%in 2005 from 20.5% in 2004. The gross margin increase for ExplosiveMetalworking reflects an increase in the U.S. gross margin rate from 28.4% in2004 to 30.6% in 2005 that was accompanied by an increase in the NobelcladEurope rate to 28.1% in 2005 from 18.8% in 2004. The gross margin improvementsfor both Explosive Metalworking and AMK Welding relate primarily to the salesincreases discussed above and the resultant more favorable absorption of fixedmanufacturing overhead expenses. The Explosive Metalworking gross marginincrease also reflects higher average prices in 2005, particularly with respectto our European operations.

 

*General and administrative expenses*

 
| ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| General  & administrative expenses |       | $        | 4,051      |     | $          | 3,335      |       | $                      | 716        |   | 21.5 | % |
| Percentage  of net sales               |       | 5.1      | %          | 6.2      | %          |       |       |                   |       |
|                                        |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Generaland administrative expenses increased by $716, or 21.5%, to $4,051 in 2005 from$3,335 in 2004. This increase in general and administrative expenses reflectsan $831 increase in spending by our U.S. operations, which was partially offsetby a $115 decrease in our European general and administrative expenses.Increased spending in our U.S. operations, which currently absorb all corporateheadquarters expenses, reflects an aggregate increase of $310 in audit, taxconsulting and investor relations expenses, a $336 increase in accruedincentive compensation expense, and the impact of annual salary adjustments.The 2005 increases in audit, tax advisory, consulting and investor relationsexpenses relates primarily to compliance with the Sarbanes-Oxley Act of 2002,tax planning initiatives and increased investor relations activities. As apercentage of net sales, general and administrative expenses decreased to 5.1%in 2005 from 6.2% in 2004. This decreased percentage is attributable to thesignificant increase in 2005 net sales.

 

*Selling expenses*

 
| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Selling  expenses        |       | $        | 3,616      |     | $          | 3,383      |       | $                      | 233        |   | 6.9 | % |
| Percentage  of net sales |       | 4.6      | %          | 6.2      | %          |       |       |                   |       |
|                          |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Sellingexpenses increased by 6.9% to $3,616 in 2005 from $3,383 in 2004. The $233increase in selling expenses reflects increases of $36 and $197 for our U.S.operations and European operations, respectively. Increased European sellingexpenses reflect an increase in outside sales commissions paid to third partyagents that represent DMC in certain countries, and is attributable to the 2005sales increase. As a result of the significant increase in 2005 net sales,selling expenses as a percentage of net sales decreased to 4.6% in 2005 from6.2% in 2004.

 

23

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*Income from operations of continuing operations*

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Income from  operations of continuing operations |       | $        | 15,768     |     | $          | 6,888      |       | $                      | 8,880      |   | 128.9 | % |
|                                                  |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Incomefrom operations increased by 128.9% to $15,768 in 2005 from $6,888 in 2004.Explosive Metalworking reported income from operations of $15,160 in 2005 ascompared to $6,609 in 2004. This 129.4% increase is largely attributable to the47.1% sales increase discussed above.

 

AMKWelding reported income from operations of $608 in 2005, an increase of 117.9%from the $279 that it reported in 2004, which increase follows the 32.9% salesincrease.

 

*Interest expense, net*

 
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Interest  expense, net |       | $        | 156        |     | $          | 531        |       | $                      | (375       | ) | (70.6 | )% |
|                        |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Netinterest expense decreased by 70.6% to $156 in 2005 from $531 in 2004. Thisdecrease in net interest expense reflects a significant decrease in averageoutstanding borrowings during 2005 that resulted from the pay down of bank lineof credit borrowings and SNPE’s conversion of a $1.2 million convertiblesubordinated note into our common stock.

 

*Income tax provision*

 
| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Income tax  provision |       | $        | 5,233      |     | $          | 1,961      |       | $                      | 3,272      |   | 166.9 | % |
| Percentage            |       | 33.5     | %          | 30.8     | %          |       |       |                   |       |
|                       |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Werecorded an income tax provision of $5,233 in 2005 compared to $1,961 in 2004.The effective tax rate increased to 33.5% in 2005 from 30.8% in 2004. The 2005and 2004 income tax provisions include $3,515 and $1,663, respectively, relatedto U.S. taxes, with the remainder relating to foreign taxes associated with theoperations of Nobelclad and its Swedish subsidiary, Nitro Metall.

 

*Loss from discontinued operations*

 
| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Loss from  discontinued operations |       | $        | —     |     | $          | 1,570      |       | $                      | (1,570     | ) | (100.0 | )% |
|                                    |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Wecompleted the divestiture of our Spin Forge division in September 2004. Underthe principal divestiture agreement, we sold the assets of the Spin Forgedivision to a third party, excluding certain equipment and real estate whichwere leased or subleased to the buyer, for a sales price of approximately$1,665 to be paid in cash according to the arrangement set forth in thedivestiture agreement. With respect to the Spin Forge manufacturing equipmentand tooling, we recorded an after tax impairment loss of $619 based upon thedifference between the carrying value of the equipment and the present value ofthe future minimum equipment lease payments from the lessee plus estimatedliquidation proceeds at the end of the minimum lease term. The 2004 loss fromdiscontinued operations of $1,570 includes a net of tax loss of $787 from theSpin Forge divestiture, which reflects the asset impairment loss discussed

 

24

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above plus divestiture transaction costs, andthe net of tax operating loss of $783 that Spin Forge reported from January 1through September 17, 2004.

 

Weheld a purchase option on the Spin Forge real estate that allowed us topurchase the real estate for $2,880, a price that was below the real estate’sappraised value. The value inherent in the real estate purchase option wasbelieved to be significant but was not considered in the calculation of theabove reported impairment loss on the Spin Forge equipment and tooling due touncertainties surrounding its ultimate realization. We completed the sale ofthe purchase option on the Spin Forge real estate in January 2006. The optionrights were sold to the property owner for $2.3 million. We will record apre-tax gain of approximately $2.2 million on this transaction, which will bereported in the first quarter of 2006 as part of the discontinued operationsline item, net of related taxes. We continue to own the Spin Forgemanufacturing equipment and tooling and lease it to the third party purchaserof the Spin Forge business. To the extent that this third party does notexercise its option to purchase all or a portion of the leased equipment andtooling when the lease term expires on January 1, 2007, we plan to immediatelyliquidate such equipment.

 

**Year ended December 31, 2004 compared to Year EndedDecember 31, 2003**

 

*Net sales*

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Net sales  |       | $        | 54,165     |     | $          | 35,779     |       | $                      | 18,386     |   | 51.4 | % |
|            |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Netsales for 2004 increased 51.4% to $54,165 from $35,779 in 2003. ExplosiveMetalworking sales increased 55.5% to $51,375 in 2004 (95% of total sales) from$33,043 in 2003 (92% of total sales). The Explosive Metalworking sales increasereflects a 68.7% increase in U.S. sales and a smaller 32.5% U.S. dollar salesincrease at Nobelclad Europe. The Nobelclad Europe sales increase ofapproximately $3.9 million includes a sales volume increase of approximately$2.7 million and a favorable foreign exchange translation adjustment ofapproximately $1.2 million relating to the decline in the value of the U.S.dollar against the Euro. The large year-to-year increase in worldwide ExplosiveMetalworking sales is principally attributable to the improved economiccondition of the industries that we serve.

 

AMKWelding contributed $2,790 to 2004 sales (5% of total sales) versus sales of$2,736 in 2003 (8% of total sales). The relatively flat sales at AMK Weldingwere expected as AMK Welding was waiting for a customer to transition a newground-based turbine system from development into production.

 

*Gross profit*

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Gross profit             |       | $        | 13,606     |     | $          | 8,977      |       | $                      | 4,629      |   | 51.6 | % |
| Percentage  of net sales |       | 25.1     | %          | 25.1     | %          |       |       |                   |       |
|                          |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Grossprofit for 2004 increased by 51.6% to $13,606 from $8,977 in 2003. Our 2004consolidated gross profit margin rate of 25.1% was the same as that for 2003.The gross profit margin for Explosive Metalworking increased from 25.0% in 2003to 25.4% in 2004, while the gross profit margin for AMK Welding decreased to20.5% in 2004 from 26.1% in 2003. The gross margin increase for ExplosiveMetalworking reflects a small decrease in the U.S. gross margin rate from 29.1%in 2003 to 28.4% in 2004 that was more than offset by an increase in theEuropean gross margin rate to 18.8% in 2004 from 17.9% in 2003. The grossmargin decline at AMK Welding is principally attributable to unfavorablechanges in product mix as higher development work performed in 2003 on acustomer’s new ground turbine did not recur at the same volume levels in 2004and was replaced by lower margin aircraft engine work.

 

25

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*General and administrative expenses*

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| General  & administrative expenses |       | $        | 3,335      |     | $          | 2,645      |       | $                      | 690        |   | 26.1 | % |
| Percentage  of net sales               |       | 6.2      | %          | 7.4      | %          |       |       |                   |       |
|                                        |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Generaland administrative expenses increased by $690, or 26.1%, to $3,335 in 2004 from$2,645 in 2003. The increase in general and administrative expense includes anapproximate $260 increase in incentive compensation expense resulting from thelarge increase in 2004 pre-tax earnings, increased tax consulting expenses ofapproximately $125 relating to special tax studies that were performed during2004 to maximize our use of available U.S. federal income tax credits anddeductions, and an increase of approximately $150 in aggregate audit, legal andboard of director fees that relates principally to the direct and indirectcosts of complying with various aspects of the Sarbanes-Oxley Act of 2002. As apercentage of net sales, general and administrative expenses decreased to 6.2%in 2004 from 7.4% in 2003. This decreased percentage is attributable to thesignificant increase in 2004 net sales.

 

*Selling expenses*

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Selling  expenses        |       | $        | 3,383      |     | $          | 3,016      |       | $                      | 367        |   | 12.2 | % |
| Percentage  of net sales |       | 6.2      | %          | 8.4      | %          |       |       |                   |       |
|                          |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Sellingexpenses increased by 12.2% to $3,383 in 2004 from $3,016 in 2003. Selling expensesfor our U.S. operations increased from $1,534 in 2003 to $2,045 in 2004, withthis increase being partially offset by a reduction in European sellingexpenses from $1,482 in 2003 to $1,338 in 2004. The increase in sellingexpenses for our U.S. operations reflects an approximate $310 increase inaccrued bonus expense associated with the higher profitability of the U.S. CladMetal Division in 2004 and increased spending in 2004 on business travel andoutside consultants relating to the higher level of business activity and thepursuit of new business development opportunities. The decline in sellingexpenses for our European operations relates principally to a decrease incommissions paid to third party agents that represent us in certain countries.As a result of the significant increase in 2004 net sales, selling expenses asa percentage of net sales decreased to 6.2% in 2004 from 8.4% in 2003.

 

*Income from operations of continuing operations*

 
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Income from  operations of continuing operations |       | $        | 6,888      |     | $          | 3,316      |       | $                      | 3,572      |   | 107.7 | % |
|                                                  |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Incomefrom operations increased by 107.7% to $6,888 in 2004 from $3,316 in 2003.Explosive Metalworking reported income from operations of $6,609 in 2004 ascompared to $2,855 in 2003. This 131.5% increase in Explosive Metalworkingoperating income is largely attributable to the 55.5% sales increase discussedabove.

 

AMKWelding reported income from operations of $279 in 2004 compared to $461 in2003. Development work performed in 2003 on a new ground-based turbine did notrecur at the same levels during 2004 and the absence of such higher margin workin 2004 is largely responsible for the decline in AMK Welding’s operatingincome levels.

 

26

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*Interest expense, net*

 
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Interest  expense, net |       | $        | 531        |     | $          | 508        |       | $                      | 23         |   | 4.5 | % |
|                        |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Interestexpense increased by 4.5% to $531 in 2004 from $508 in 2003. This increase ininterest expense reflects an increase in average borrowings under our U.S. bankline of credit to support the higher level of working capital required by thesignificant growth in production and sales levels in 2004. This increase offseta reduction in our outstanding term debt, from $8,649 at December 31, 2003 to$5,957 at the end of 2004. The increase in interest expense also reflectshigher average interest rates in the U.S. on our variable rate line of creditand term debt borrowings. Related party interest expense totaled $146 and $182in 2004 and 2003, respectively.

 

*Income tax provision*

 
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Income tax  provision |       | $        | 1,961      |     | $          | 1,504      |       | $                      | 457        |   | 30.4 | % |
| Percentage            |       | 30.8     | %          | 53.9     | %          |       |       |                   |       |
|                       |            |          |            |          |            |            |            |                        |            |  |  |  |

 

Werecorded an income tax provision of $1,961 in 2004 on income from continuing operationsas compared to an income tax provision of $1,504 in 2003. The effective taxrate decreased to 30.8% in 2004 from 53.9% in 2003. The 2004 and 2003 incometax provisions include $1,663 and $1,480, respectively, related to U.S. taxes,with the remainder relating to foreign taxes associated with the operations ofNobelclad and its Swedish subsidiary, Nitro Metall. Income tax provisions onthe 2004 and 2003 earnings of Nobelclad and Nitro Metall have been providedbased upon the respective French and Swedish statutory tax rates. Our 2004effective tax rate was unusually low as a result of the recognition of U.S. taxbenefits aggregating more than $500 relating to research and development taxcredits, extraterritorial income exclusions and foreign tax credits. These taxcredits and income exclusions were generated from business activities andtransactions that occurred in tax years prior to 2004 but were not probable andestimable until the fourth quarter of 2004 when special tax studies werecompleted.

 

Theeffective tax rate for 2003 was high because U.S. taxes were provided at a 39%rate on $732 of intercompany dividends received in 2003 from Nobelclad. Thedividend income was eliminated in our consolidated statement of operations, butU.S. taxes were provided on such dividend income in the consolidated income taxprovision without any offsetting tax credit as the recoverability of that taxcredit did not meet the “more likely than not” test required by Statement ofFinancial Accounting Standard No. 109, Accounting for Income Taxes. Thisincreased the consolidated effective tax rate from an expected rate ofapproximately 39% to an actual rate of 53.9%.

 

*Loss from Discontinued Operations*

 
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------------------|------------|
| Loss from  discontinued operations |       | $        | 1,570      |     | $          | 1,993      |       | $                      | (423       | ) | (21.2 | )% |
|                                    |            |          |            |          |            |            |            |                        |            |  |  |  |

 

OnOctober 7, 2003, we completed the sale of our PMP division. In our 2003financial statements, we reported the loss on the sale of PMP as well as theoperating losses reported by PMP in prior years as discontinued operations, netof related tax benefits. On September 17, 2004, we completed the divestiture ofour Spin Forge division, as discussed above. The net loss from the discontinuedoperations of PMP and Spin Forge decreased from $1,993 in 2003 to $1,570, withthe 2004 net loss including a net of tax loss of $787 from the Spin Forgedivestiture and the 2003 net loss including a net of tax loss of $710 from thesale of PMP. Discontinued operations included net of tax operating losses of$783 in 2004 and $1,283 in 2003, with the entire 2004 amount relating to SpinForge and the 2003 amount including net of tax operating losses from both SpinForge and PMP in the amounts of $696 and $587, respectively.

 

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# **LIQUIDITY AND CAPITAL RESOURCES**

# ** **

Wehave historically financed our operations from a combination of internallygenerated cash flow, revolving credit borrowings, various long-term debtarrangements and the issuance of common stock. We believe that cash flow fromoperations and funds available under our current credit facilities and anyfuture replacement thereof will be sufficient to fund the working capital, debtservice and capital expenditure requirements of our current business operationsfor the foreseeable future. Nevertheless, our ability to generate sufficientcash flows from operations will depend upon our success in executing ourstrategies, including our ability to secure new customer orders at ouroperating divisions, and to continue to implement cost-effective internalprocesses.

 

*Debt and other contractual obligations andcommitments*

 

Anyrestriction on the availability of borrowing under our credit facilities couldnegatively affect our ability to meet future cash requirements. Our existingloan agreements include various covenants and restrictions, certain of whichrelate to the payment of dividends or other distributions to stockholders,redemption of capital stock, incurrence of additional indebtedness, mortgaging,pledging or disposition of major assets and maintenance of specified financialratios. As of December 31, 2005, we were in compliance with all financialcovenants and other provisions of our debt agreements.

 

Thetable below presents principal cash flows by expected maturity dates for ourdebt obligations and other contractual obligations and commitments as ofDecember 31, 2005:

 
| ** **                           | ** ** | **Payment Due by Period**   | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **As of December 31, 2005** | ** ** |
| ** **                           | ** ** | **Less than**               | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **1 Year**                  | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** | ** ** | ** ** |
| SNPE S.A. line of credit             |       | $                           | 45         |   | $ | — |   | $ | — |   | $ | — |   | $ | 45 |   |
| Term loan with French bank           |       | 343                         |       | 686 |   | — |   | — |   | 1,029 |   |
| Industrial development revenue bonds |       | 185                         |       | 420 |   | 490 |   | 625 |   | 1,720 |   |
| Total debt  obligations *            |       | 573                         |       | 1,106 |   | 490 |   | 625 |   | 2,794 |   |
|                                 |       |                        |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations**       |       | 337                         |       | 556 |   | 437 |   | 155 |   | 1,485 |   |
|                                 |       |                        |       |   |   |   |   |   |   |   |   |
| Purchase  obligations **             |       | 5,991                       |       | — |   | — |   | — |   | 5,991 |   |
| Total                                |       | $                           | 6,901      |   | $ | 1,662 |   | $ | 927 |   | $ | 780 |   | $ | 10,270 |   |

 

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*                 Reflectedin accompanying consolidated balance sheets. Expected interest payments on theabove debt obligations are not expected to be significant for the yearspresented.

**          Notreflected in accompany consolidated balance sheets.

 

Formore information about our debt obligations, refer to Note 3 to ourconsolidated financial statements elsewhere in this annual report.

 

*Cash flows from operating activities*

 

Netcash flows provided by operating activities for 2005 totaled $11,638.Significant sources of operating cash flow included net income of $10,372,non-cash depreciation and amortization expense of $1,568, and $3,728 from thetax benefit related to stock options exercised during the year. These sourcesof operating cash flow were partially offset by a provision for deferred incometaxes of $1,431 and negative net changes in various components of workingcapital in the amount of $2,599. Net negative changes in working capitalincluded an increase in accounts receivable, inventories and prepaid expensesof $2,657, $4,486 and $327, respectively. These negative changes in working capitalwere partially offset by an increase in accounts payable and accrued expensesand other liabilities of $1,733 and $3,138 respectively.

 

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Netcash flows provided by operating activities for 2004 totaled $3,110, whichconsisted of net cash flows from continuing operations of $4,544 that waspartially offset by net cash flows used in discontinued operations of $1,434.Significant sources of operating cash flow from continuing operations includedincome from continuing operations of $4,403, non-cash depreciation andamortization expense of $1,466, a provision for deferred income taxes of$1,181, and $311 from the tax benefit related to stock options exercised duringthe year. These sources of operating cash flow were partially offset bynegative net changes in various components of working capital in the amount of$2,817. Net negative changes in working capital included an increase inaccounts receivable and inventories of $6,963 and $1,993, respectively. Thesenegative changes in working capital were partially offset by increases inaccounts payable and in accrued expenses and other liabilities of $3,126 and$2,375 respectively, and a decrease in prepaid expenses and other of $638. Thelarge increases in accounts receivable and inventories reflect the higherproduction and sales volume associated with the strong performance of theExplosive Metalworking business during the last half of 2004. We were able tofinance a significant portion of the build-up in accounts receivable andinventories by increasing accounts payable and accrued expenses.

 

Netcash flows provided by operating activities for 2003 was $1,633, whichconsisted of net cash flows provided by continuing operations of $2,846 thatwas partially offset by net cash flows used in discontinued operations of$1,213. Sources of operating cash flow from continuing operations consistedprimarily of income from continuing operations of $1,285, non-cash depreciationand amortization expense of $1,333, and a provision for deferred income taxesof $1,328. Net negative changes in various components of working capitaltotaling $1,100 partially offset the foregoing sources of operating cash flow.Negative changes in working capital included an increase in inventories of$1,020, an increase in prepaid and other of $382, and a decrease in accruedexpenses and other liabilities of $1,175. These negative changes in workingcapital were partially offset by a $1,257 decrease in accounts receivable and a$220 increase in accounts payable.

 

*Cash flows from investing activities*

 

Netcash flows used in investing activities for 2005 were $3,494 and consistedprimarily of $2,848 in capital expenditures and $1,950 for investment inmarketable securities that was partially offset by a $1,016 payment received ona portion of the outstanding receivable relating to the Spin Forge divestiture.

 

Netcash flows used in investing activities for 2004 were $419 and consistedprimarily of $1,138 in capital expenditures that was partially offset by a $580reduction in the promissory note receivable relating to the 2003 sale of thePMP Division, the release of $190 in restricted cash from bond proceeds andinvesting activities of discontinued operations of $45.

 

Netcash flows used in investing activities for 2003 were $1,136 and consistedprimarily of $919 in capital expenditures and $224 used by investing activitiesof discontinued operations.

 

*Cash flows from financing activities*

 

Netcash flows used in financing activities for 2005 were $4,662. Significant usesof cash for financing activities included net repayments on bank lines ofcredit if $3,216, payment of annual dividends of $1,155, final principalpayments on the SNPE term loan of $667, industrial development revenue bondprincipal payments of $790 and an annual principal payment of $361 on a termloan with a French bank. Sources of cash flow from financing activities include$1,555 in net proceeds from the issuance of common stock relating to theexercise of stock options and employee stock purchases under our employee stockpurchase plan.

 

Netcash flows used in financing activities for 2004 were $897. Significant uses ofcash for financing activities included related party debt repayments of $1,333to SNPE, industrial development revenue bond principal payments of $1,120,related party lines of credit repayment of $624 to Groupe SNPE, and principalpayment on our term loan with a French bank of $360. These payments werepartially offset by a net increase of $1,915 in bank lines of credit borrowingsand $889 in net proceeds from the issuance of common stock relating to theexercise of stock options and employee stock purchases under our employee stockpurchase plan.

 

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Netcash flows used in financing activities for 2003 were $1,267. Significant usesof cash for financing activities included related party debt repayments of$1,333, industrial development revenue bond principal payments of $855 andfinancing activities of discontinued operations of $97. These payments werepartially offset by related party and bank lines of credit borrowings of $425and $335 respectively.

 

**Critical Accounting Policies**

 

Ourhistorical consolidated financial statements and notes to our historicalconsolidated financial statements contain information that is pertinent to ourmanagement’s discussion and analysis of financial condition and results ofoperations. Preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires that our managementmake estimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities. However, the accounting principles used by us generallydo not change our reported cash flows or liquidity. Interpretation of theexisting rules must be done and judgments made on how the specifics of a givenrule apply to us.

 

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments, inventory valuation and impact of foreign currency exchange raterisks. Management’s judgments and estimates in these areas are based oninformation available from both internal and external sources, and actualresults could differ from the estimates, as additional information becomesknown. We believe the following to be our most critical accounting policies.

 

*Revenue recognition*

 

Salesof clad metal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require us to providecertifications relative to metals used, services performed and the results ofany non-destructive testing that the customer has requested be performed. Anynon-conformance issues are resolved before the product is shipped and billed.Revenue is recognized only when all four of the following criteria have beensatisfied: persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured. Forcontracts that require multiple shipments, revenue is recorded only for theunits included in each individual shipment. If, as a contract proceeds towardcompletion, projected total cost on an individual contract indicates apotential loss, we provide currently for such anticipated loss.

 

*Asset impairments*

 

Wereview our long-lived assets and certain identifiable intangibles to be heldand used by us for impairment whenever events or changes in circumstancesindicate their carrying amount may not be recoverable. In so doing, we estimatethe future net cash flows expected to result from the use of the asset and itseventual disposition. If the sum of the expected future net cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, an impairment loss is recognized to reduce the asset to itsestimated fair value. Otherwise, an impairment loss is not recognized.Long-lived assets and certain identifiable intangibles to be disposed of, ifany, are reported at the lower of carrying amount or fair value less cost tosell.

 

*Goodwill*

 

Goodwillis tested for impairment at least annually on reporting units one level belowthe segment level and any impairment is based on the reporting unit’s estimatedfair value. Fair value can be determined based on discounted cash flows,comparable sales or valuations of similar businesses. Impairment occurs whenthe carrying amount of goodwill exceeds its estimated fair value. Our policy isto test goodwill for impairment in the fourth quarter of each year unless anindicator of impairment arises earlier.

 

Theentire amount of goodwill, which had a carrying value of $847 on our balancesheet as of December 31, 2005, relates to our U.S. Explosives Metalworkingsegment. Based on the analysis performed in the fourth quarter of 2005, noimpairment was recorded to the carrying value of goodwill.

 

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*Impact of foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period. Exchange rate fluctuations ontranslating foreign currency financial statements into U.S. dollars that resultin unrealized gains or losses are referred to as translation adjustments.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income(loss). Transactions denominated in currencies other than the local currencyare recorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losses,which are reflected in income as unrealized (based on period-end translations)or realized upon settlement of the transactions. Cash flows from our operationsin foreign countries are translated at actual exchange rates when known, or atthe average rate for the period. As a result, amounts related to assets andliabilities reported in the consolidated statements of cash flows will notagree to changes in the corresponding balances in the consolidated balancesheets. The effects of exchange rate changes on cash balances held in foreigncurrencies are reported as a separate line item below cash flows from financingactivities.

 

*Income taxes*

 

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No. 109, Accounting for Income Taxes (SFAS 109) which requires therecognition of deferred tax assets and deferred tax liabilities for theexpected future income tax consequences of transactions that have been includedin our financial statements or tax returns. Deferred tax assets and liabilitiesare determined based on the temporary differences between the ConsolidatedFinancial Statement base and the tax base of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse. We routinely evaluate deferred tax assets to determine if they willmore likely than not be recovered from future projected taxable income andrecords a valuation allowance accordingly.

 

During2005, we completed an analysis of prior year tax credits and related items. Asa result of the analysis, we filed amended federal and state income taxreturns. The amended state returns reported additional net operating losses andcredits above the amounts we had previously recorded on its books and records.In assessing these additional losses and credits, we determined that theutilization of a portion of these was not probable, due to potential changes inthe states in which we have income tax nexus. Thus, we recorded a net valuationallowance of approximately $177 against the deferred tax assets during 2005.

 

**Off Balance Sheet Arrangements**

 

Wehave no obligations, assets or liabilities other than those disclosed in ourfinancial statements forming part of this annual report; no trading activitiesinvolving non-exchange traded contracts accounted for at fair value; and norelationships and transactions with persons or entities that derive benefitsfrom their non-independent relationship with us or our related parties.

 

**Forward-Looking Statements**

 

Thisannual report and the documents incorporated by reference into it containcertain forward-looking statements within the safe harbor provisions of thePrivate Securities Litigations Reform Act of 1995. These statements includeinformation with respect to our financial condition and its results ofoperations and businesses. Words such as “anticipates,” “expects,” “intends,”“plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “continue,” “project”and similar expressions, as well as statements in the future tense, identifyforward-looking statements.

 

Theseforward-looking statements are not guarantees of our future performance and aresubject to risks and uncertainties that could cause actual results to differmaterially from the results contemplated by the forward-looking statements.These risks and uncertainties include:

 

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•                  The ability to obtain new contracts atattractive prices;

 

•                  The size and timing of customer orders;

 

•                  Fluctuations in customer demand;

 

•                  Competitive factors;

 

•                  The timely completion of contracts;

 

•                  Any actions which may be taken by themajority stockholder, Groupe SNPE, as our controlling stockholder with respectto us and our business;

 

•                  The timing and size of expenditures;

 

•                  The timely receipt of government approvalsand permits;

 

•                  The adequacy of local labor supplies at ourfacilities;

 

•                  The availability and cost of funds; and

 

•                  General economic conditions, bothdomestically and abroad.

 

Theeffects of these factors are difficult to predict. New factors emerge from timeto time and we cannot assess the potential impact of any such factor on thebusiness or the extent to which any factor, or combination of factors, maycause results to differ materially from those contained in any forward-lookingstatement. Any forward-looking statement speaks only as of the date of thisannual report and we do not undertake any obligation to update anyforward-looking statement to reflect events or circumstances after the date ofsuch statement or to reflect the occurrence of unanticipated events. In addition,see “Risk Factors” for a discussion of these and other factors.

 

**Recent Accounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (revised 2004), Share-BasedPayment (“SFAS 123R”), which is a revision of SFAS 123. SFAS 123R supersedesAPB 25 and amends Statement of Financial Accounting Standards No. 95, Statementof Cash Flows. Generally the approach in SFAS 123R is similar to the approachdescribed in SFAS 123. However, SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran option. In addition, SFAS 123R requires any excess tax benefits receivedupon exercise of options to be presented as a financing activity on thestatement of cash flows rather than as an operating activity as it is currentlypresented.

 

Wewill adopt SFAS 123R in the first quarter of 2006 using the modifiedprospective method and are currently evaluating the effect that the adoptionwill have on our financial position and results of operations. We havepreliminarily estimated that the impact of adoption will result in a reductionin full year 2006 net earnings equal to approximately $0.04 to $0.06 perdiluted share.

 

InNovember 2004, the FASB issued SFAS 151, Inventory Costs, which amends theguidance in ARB No. 43, Chapter 4, Inventory Pricing. This statement requiresabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial to be excluded from inventory costing and instead included as periodexpenses. In addition, this standard requires the allocation of fixedproduction overhead to be based on normal capacity of the productionfacilities. We do not believe the adoption of this standard on January 1, 2006will have a significant impact on its results of operations.

 

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In May 2005, the FASB issued SFAS 154, AccountingChanges and Error Corrections, which requires the direct effects of voluntaryaccounting principle changes to be retrospectively applied to prior periods’financial statements. This Statement does not change the transition provisionsof any existing accounting pronouncements, but would apply in the unusualinstance that a pronouncement does not include specific transition provisions.SFAS No. 154 maintains existing guidance with respect to accounting estimatechanges and corrections of errors. The Statement is effective for us beginningon January 1, 2006. Adoption is not expected to have a material impact on ourfinancial position, results of operation or cash flows.

 

33

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**ITEM**7A.                    **Quantitative and Qualitative Disclosure about MarketRisk**

 

Thetable below provides information about our financial instruments that aresensitive to changes in interest rates, primarily debt obligations. Since mostof our obligations carry variable interest rates, there is no materialdifference between the book value and the fair value of those obligations.

 
| ** **                                                 | ** ** | **As of December 31,  2005** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **(Dollars in Thousands)**        | ** ** |
|                                                       |       |                                        |       |
| SNPE S.A.  line of credit – variable rate             |       | $                                           | 45         |   |
| Interest rate                                              |       | 3.86                                        | %          |
|                                                       |       |                                        |       |
| Term-loan  with French bank – variable rate           |       | $                                           | 1,029      |   |
| Interest rate                                              |       | 2.76                                        | %          |
|                                                       |       |                                        |       |
| Industrial  development revenue Bonds – variable rate |       | $                                           | 1,720      |   |
| Interest rate                                              |       | 3.66                                        | %          |

 

Thefunctional currencies for the foreign operations of Nobelclad and Nitro Metallare the Euro and the Swedish Krona, respectively. Thus, the major foreignexchange risks relates to the Euro / Swedish Krona and Euro / U.S. Dollarconversion rates. Additionally, we occasionally enter into transactionsdenominated in currencies other than the local currency, which exposes us toother foreign exchange risks. Sales made in currencies other than U.S. Dollarsaccounted for 32%, 30% and 35% of total sales for the years ended 2005, 2004and 2003, respectively.

 

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**ITEM 8.****                            ****Financial Statements andSupplementary Data**

 

**DYNAMIC MATERIALS CORPORATION AND SUBSIDIARY**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**As of December 31, 2005 and 2004 and for the ThreeYears Ended**

**December 2005, 2004 and 2003**

 
| Report of Independent  Registered Public Accounting Firm | 36     |
|----------------------------------------------------------|--------|
| Financial  Statements:                                   |   |
| Consolidated Balance Sheets                              | 37     |
| Consolidated Statements of  Operations                   | 39     |
| Consolidated Statements of  Stockholders’ Equity    | 40     |
| Consolidated Statements of  Cash Flows                   | 41     |
| Notes to  Consolidated Financial Statements              | 43     |

 

Theconsolidated financial statement schedules required by Regulation S-X are filedunder Item 15 “Exhibits and Financial Statement Schedules”.

 

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**Report of Independent Registered Public Accounting Firm**

 

TheStockholders and the

Boardof Directors of Dynamic Materials Corporation:

 

Wehave audited the accompanying consolidated balance sheets of Dynamic MaterialsCorporation and subsidiary as of December 31, 2005 and 2004, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2005. Theseconsolidated financial statements are the responsibility of Dynamic MaterialsCorporation’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made my management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofDynamic Materials Corporation and subsidiary at December 31, 2005 and 2004, andthe consolidated results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of DynamicMaterials Corporation’s internal control over financial reporting as ofDecember 31, 2005, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 10, 2006expressed an unqualified opinion thereon.

 

 
|             | /s/ ERNST & YOUNG LLP |   |
|------------------|---------------------------|--------|
|             |                      |
|             |                      |
| Denver, Colorado |                      |
| March 10, 2006   |                      |

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004

(Dollars in Thousands,Except Per Share Data)

 
| ** **                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                      |       |     |       |     |       |
|                                                                                        |       |     |       |     |       |
| CURRENT  ASSETS:                                                                            |       |     |       |     |       |
| Cash and cash equivalents                                                                   |       | $        | 5,763      |     | $          | 2,404 |   |
| Marketable securities                                                                       |       | 1,950    |       | —   |       |
| Accounts receivable, net of allowance for  doubtful accounts of $301 and $280, respectively |       | 15,576   |       | 13,936   |       |
| Inventories                                                                                 |       | 11,869   |       | 8,000    |       |
| Prepaid expenses and other                                                                  |       | 822      |       | 527      |       |
| Current portion of other receivables  related to discontinued operations                    |       | —   |       | 943      |       |
| Current deferred tax assets                                                                 |       | 572      |       | 436      |       |
|                                                                                        |       |     |       |     |       |
| Total current assets                                                                        |       | 36,552   |       | 26,246   |       |
|                                                                                        |       |     |       |     |       |
| PROPERTY,  PLANT AND EQUIPMENT                                                              |       | 22,635   |       | 20,832   |       |
| Less - Accumulated depreciation                                                             |       | (10,063  | )          | (8,988   | )          |
|                                                                                        |       |     |       |     |       |
| Property, plant and equipment, net                                                          |       | 12,572   |       | 11,844   |       |
|                                                                                        |       |     |       |     |       |
| GOODWILL,  net                                                                              |       | 847      |       | 847      |       |
|                                                                                        |       |     |       |     |       |
| DEFERRED TAX  ASSETS                                                                        |       | 819      |       | —   |       |
|                                                                                        |       |     |       |     |       |
| OTHER  ASSETS, net                                                                          |       | 101      |       | 171      |       |
|                                                                                        |       |     |       |     |       |
| OTHER  RECEIVABLES RELATED TO DISCONTINUED OPERATIONS                                       |       | 681      |       | 753      |       |
|                                                                                        |       |     |       |     |       |
| ASSETS OF  DISCONTINUED OPERATIONS                                                          |       | 3,739    |       | 3,892    |       |
|                                                                                        |       |     |       |     |       |
| TOTAL ASSETS                                                                                |       | $        | 55,311     |     | $          | 43,753 |   |

 

The accompanying notes arean integral part

of these ConsolidatedFinancial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004

(Dollars in Thousands,Except Per Share Data)

 
| ** **                                                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                           |       |     |       |     |       |
|                                                                                                                                |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                               |       |     |       |     |       |
| Accounts payable                                                                                                                    |       | $        | 7,278      |     | $          | 6,041 |   |
| Accrued expenses                                                                                                                    |       | 2,594    |       | 1,367    |       |
| Accrued employee compensation and benefits                                                                                          |       | 2,508    |       | 1,920    |       |
| Customer advances                                                                                                                   |       | 1,885    |       | 1,232    |       |
| Bank lines of credit                                                                                                                |       | —   |       | 3,216    |       |
| Related party debt                                                                                                                  |       | 45       |       | 2,001    |       |
| Current maturities on long-term debt                                                                                                |       | 528      |       | 1,185    |       |
|                                                                                                                                |       |     |       |     |       |
| Total current liabilities                                                                                                           |       | 14,838   |       | 16,962   |       |
|                                                                                                                                |       |     |       |     |       |
| LONG-TERM  DEBT                                                                                                                     |       | 2,221    |       | 2,906    |       |
|                                                                                                                                |       |     |       |     |       |
| DEFERRED TAX  LIABILITIES                                                                                                           |       | 195      |       | 729      |       |
|                                                                                                                                |       |     |       |     |       |
| OTHER  LONG-TERM LIABILITIES                                                                                                        |       | 222      |       | 206      |       |
|                                                                                                                                |       |     |       |     |       |
| LIABILITIES  OF DISCONTINUED OPERATIONS                                                                                             |       | 2,880    |       | 2,880    |       |
|                                                                                                                                |       |     |       |     |       |
| COMMITMENTS  AND CONTINGENT LIABILITIES                                                                                             |       | —   |       | —   |       |
|                                                                                                                                |       |     |       |     |       |
| Total liabilities                                                                                                                   |       | 20,356   |       | 23,683   |       |
|                                                                                                                                |       |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                         |       |     |       |     |       |
| Preferred stock, $.05 par value; 4,000,000  shares authorized; no issued and outstanding shares                                     |       | —   |       | —   |       |
| Common stock, $.05 par value; 15,000,000  shares authorized; 11,758,920 and 10,640,876 shares issued and outstanding,  respectively |       | 588      |       | 532      |       |
| Additional paid-in capital                                                                                                          |       | 19,778   |       | 13,351   |       |
| Retained earnings                                                                                                                   |       | 14,104   |       | 4,887    |       |
| Other cumulative comprehensive income                                                                                               |       | 485      |       | 1,300    |       |
|                                                                                                                                |       |     |       |     |       |
| Total stockholders’ equity                                                                                                     |       | 34,955   |       | 20,070   |       |
|                                                                                                                                |       |     |       |     |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $        | 55,311     |     | $          | 43,753 |   |

 

The accompanying notes arean integral part

of these ConsolidatedFinancial Statements.

 

38

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands, Except Per Share Data)

 
| ** **                                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| NET SALES                                                         |       | $          | 79,291     |       | $          | 54,165     |       | $ | 35,779 |   |
| COST OF  PRODUCTS SOLD                                            |       | 55,856     |       | 40,559     |       | 26,802     |       |
| Gross profit                                                      |       | 23,435     |       | 13,606     |       | 8,977      |       |
| COSTS AND  EXPENSES:                                              |       |       |       |       |       |       |       |
| General and administrative expenses                               |       | 4,051      |       | 3,335      |       | 2,645      |       |
| Selling expenses                                                  |       | 3,616      |       | 3,383      |       | 3,016      |       |
| Total costs and expenses                                          |       | 7,667      |       | 6,718      |       | 5,661      |       |
| INCOME FROM  OPERATIONS OF CONTINUING OPERATIONS                  |       | 15,768     |       | 6,888      |       | 3,316      |       |
| OTHER INCOME  (EXPENSE):                                          |       |       |       |       |       |       |       |
| Other income (expense), net                                       |       | (7         | )          | 7          |       | (19        | )          |
| Interest expense                                                  |       | (171       | )          | (408       | )          | (336       | )          |
| Related party interest expense                                    |       | (48        | )          | (146       | )          | (182       | )          |
| Interest income                                                   |       | 63         |       | 23         |       | 10         |       |
| INCOME BEFORE INCOME TAXES AND DISCONTINUED  OPERATIONS           |       | 15,605     |       | 6,364      |       | 2,789      |       |
| INCOME TAX PROVISION                                              |       | 5,233      |       | 1,961      |       | 1,504      |       |
| INCOME FROM CONTINUING OPERATIONS BEFORE DISCONTINUED  OPERATIONS |       | 10,372     |       | 4,403      |       | 1,285      |       |
| DISCONTINUED  OPERATIONS:                                         |       |       |       |       |       |       |       |
| Loss from discontinued operations, net of  tax                    |       | —     |       | (783       | )          | (1,283     | )          |
| Loss on sale of discontinued operations,  net of tax              |       | —     |       | (787       | )          | (710       | )          |
| Loss from discontinued operations                                 |       | —     |       | (1,570     | )          | (1,993     | )          |
| NET INCOME  (LOSS)                                                |       | $          | 10,372     |       | $          | 2,833      |       | $ | (708 | ) |
| INCOME  (LOSS) PER SHARE - BASIC:                                 |       |       |       |       |       |       |       |
| Continuing operations                                             |       | $          | 0.92       |       | $          | 0.43       |       | $ | 0.13 |   |
| Discontinued operations                                           |       | —     |       | (0.15      | )          | (0.20      | )          |
| Net income (loss)                                                 |       | $          | 0.92       |       | $          | 0.28       |       | $ | (0.07 | ) |
| INCOME  (LOSS) PER SHARE - DILUTED:                               |       |       |       |       |       |       |       |
| Continuing operations                                             |       | $          | 0.86       |       | $          | 0.41       |       | $ | 0.13 |   |
| Discontinued operations                                           |       | —     |       | (0.14      | )          | (0.19      | )          |
| Net income (loss)                                                 |       | $          | 0.86       |       | $          | 0.27       |       | $ | (0.06 | ) |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING -                  |       |       |       |       |       |       |       |
| Basic                                                             |       | 11,290,053 |       | 10,269,080 |       | 10,134,648 |       |
| Diluted                                                           |       | 12,086,884 |       | 10,968,090 |       | 10,621,612 |       |
|                                                              |       |       |       |       |       |       |       |
| DIVIDENDS  DECLARED PER COMMON SHARE                              |       | $          | 0.10       |       | $          | —     |       | $ | — |   |

 

The accompanying notes are an integral part of these ConsolidatedFinancial Statements

 

39

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Amounts in Thousands)

 
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** **        | ** ** | ** **         | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** **        | ** ** | **Comprehensive**  | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income (Loss)** | ** ** |
| ** **                                                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**         | ** ** | **for the Period** | ** ** |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |              |       |               |       |
| Balances, December 31, 2002                                        |       | 10,123           |       | $           | 506        |           | $          | 12,120            |       | $              | 2,762      |              | $          | 175                |       | $ | 15,563 |   |   |   |
| Shares issued for  stock option exercises                          |       | 10               |       | 1           |       | 11             |       | —            |       | —         |       | 12                |       |               |       |
| Shares issued in  connection with the employee stock purchase plan |       | 45               |       | 2           |       | 43             |       | —            |       | —         |       | 45                |       |               |       |
| Net loss                                                           |       | —           |       | —      |       | —         |       | (708              | )          | —         |       | (708              | )          | (708               | )          |
| Derivative  valuation, net of tax of $27                           |       | —           |       | —      |       | —         |       | —            |       | (43            | )          | (43               | )          | (43                | )          |
| Change in  cumulative foreign currency translation adjustment      |       | —           |       | —      |       | —         |       | —            |       | 715            |       | 715               |       | 715                |       |
| Balances, December 31, 2003                                        |       | 10,178           |       | 509         |       | 12,174         |       | 2,054             |       | 847            |       | 15,584            |       | (36                | )          |
| Shares issued for  stock option exercises                          |       | 424              |       | 21          |       | 815            |       | —            |       | —         |       | 836               |       |               |       |
| Shares issued in  connection with the employee stock purchase plan |       | 39               |       | 2           |       | 51             |       | —            |       | —         |       | 53                |       |               |       |
| Tax benefit  related to stock options                              |       | —           |       | —      |       | 311            |       | —            |       | —         |       | 311               |       |               |       |
| Net income                                                         |       | —           |       | —      |       | —         |       | 2,833             |       | —         |       | 2,833             |       | 2,833              |       |
| Derivative  valuation, net of tax of $27                           |       | —           |       | —      |       | —         |       | —            |       | 43             |       | 43                |       | 43                 |       |
| Change in  cumulative foreign currency translation adjustment      |       | —           |       | —      |       | —         |       | —            |       | 410            |       | 410               |       | 410                |       |
| Balances, December 31, 2004                                        |       | 10,641           |       | 532         |       | 13,351         |       | 4,887             |       | 1,300          |       | 20,070            |       | 3,286              |       |
| Shares issued for  stock option exercises                          |       | 707              |       | 35          |       | 1,447          |       | —            |       | —         |       | 1,482             |       |               |       |
| Shares issued in  connection with the employee stock purchase plan |       | 11               |       | 1           |       | 72             |       | —            |       | —         |       | 73                |       |               |       |
| Dividends paid                                                     |       | —           |       | —      |       | —         |       | (1,155            | )          | —         |       | (1,155            | )          |               |       |
| Conversion of  subordinated note                                   |       | 400              |       | 20          |       | 1,180          |       | —            |       | —         |       | 1,200             |       |               |       |
| Tax benefit  related to stock options                              |       | —           |       | —      |       | 3,728          |       | —            |       | —         |       | 3,728             |       |               |       |
| Net income                                                         |       | —           |       | —      |       | —         |       | 10,372            |       | —         |       | 10,372            |       | 10,372             |       |
| Change in  cumulative foreign currency translation adjustment      |       | —           |       | —      |       | —         |       | —            |       | (815           | )          | (815              | )          | (815               | )          |
| Balances, December 31, 2005                                        |       | 11,759           |       | $           | 588        |           | $          | 19,778            |       | $              | 14,104     |              | $          | 485                |       | $ | 34,955 |   | $ | 9,557 |   |
|                                                                    |            |                  |            |             |            |                |            |                   |            |                |            |                   |            |                    |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these ConsolidatedFinancial Statements.

 

40

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 
| ** **                                                                                 | ** ** | **2005**   | ** ** | **2004**          | ** ** | **2003**          | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **Revised - see** | ** ** | **Revised - see** | ** ** |
| ** **                                                                                 | ** ** | ** ** | ** ** | **Note 2**        | ** ** | **Note 2**        | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                                     |       |       |       |              |       |              |       |
| Net income (loss)                                                                          |       | $          | 10,372     |              | $          | 2,833             |       | $ | (708 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities - |       |       |       |              |       |              |       |
| Loss from discontinued operations                                                          |       | —     |       | 1,570             |       | 1,993             |       |
| Depreciation                                                                               |       | 1,513      |       | 1,374             |       | 1,237             |       |
| Amortization                                                                               |       | 14         |       | 13                |       | 11                |       |
| Amortization of capitalized debt issuance  costs                                           |       | 41         |       | 79                |       | 85                |       |
| Provision for deferred income taxes                                                        |       | (1,431     | )          | 1,181             |       | 1,328             |       |
| Tax benefit related to exercise of stock  options                                          |       | 3,728      |       | 311               |       | —            |       |
| Change in -                                                                                |       |       |       |              |       |              |       |
| Accounts receivable, net                                                                   |       | (2,657     | )          | (6,963            | )          | 1,257             |       |
| Inventories                                                                                |       | (4,486     | )          | (1,993            | )          | (1,020            | )          |
| Prepaid expenses and other                                                                 |       | (327       | )          | 638               |       | (382              | )          |
| Accounts payable                                                                           |       | 1,733      |       | 3,126             |       | 220               |       |
| Accrued expenses and other liabilities                                                     |       | 3,138      |       | 2,375             |       | (1,175            | )          |
|                                                                                       |       |       |       |              |       |              |       |
| Net cash flows provided by continuing  operations                                          |       | 11,638     |       | 4,544             |       | 2,846             |       |
| Net cash flows used in discontinued  operations                                            |       | —     |       | (1,434            | )          | (1,213            | )          |
|                                                                                       |       |       |       |              |       |              |       |
| Net cash provided by operating activities                                                  |       | 11,638     |       | 3,110             |       | 1,633             |       |
|                                                                                       |       |       |       |              |       |              |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                                     |       |       |       |              |       |              |       |
| Acquisition of property, plant and equipment                                               |       | (2,848     | )          | (1,138            | )          | (919              | )          |
| Investment in marketable securities                                                        |       | (1,950     | )          | —            |       | —            |       |
| Release of restricted cash from bond  proceeds                                             |       | —     |       | 190               |       | —            |       |
| Change in other non-current assets                                                         |       | 288        |       | (6                | )          | 7                 |       |
| Payment received on other receivables  related to discontinued operations                  |       | 1,016      |       | 580               |       | —            |       |
| Investing activities of discontinued  operations                                           |       | —     |       | (45               | )          | (224              | )          |
|                                                                                       |       |       |       |              |       |              |       |
| Net cash flows used in investing activities                                                |       | (3,494     | )          | (419              | )          | (1,136            | )          |
|                                                                                            |            |            |            |                   |            |                   |            |  |  |  |

 

The accompanying notes are anintegral part

of these Consolidated FinancialStatements.

 

41

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 
| ** **                                                             | ** ** | **2005**   | ** ** | **2004**          | ** ** | **2003**          | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **Revised - see** | ** ** | **Revised - see** | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **Note 2**        | ** ** | **Note 2**        | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |       |       |       |              |       |              |       |
| Borrowings / (repayments) on bank lines of  credit, net                |       | (3,216     | )          | 1,915             |       | 335               |       |
| Borrowings / (repayments) on related party  lines of credit, net       |       | (75        | )          | (624              | )          | 425               |       |
| Payment on SNPE, Inc. term loan                                        |       | (667       | )          | (1,333            | )          | (1,333            | )          |
| Payment on industrial development revenue  bond                        |       | (790       | )          | (1,120            | )          | (855              | )          |
| Payment on term loan with French bank                                  |       | (361       | )          | (360              | )          | —            |       |
| Payment of dividends                                                   |       | (1,155     | )          | —            |       | —            |       |
| Change in other long-tem liabilities                                   |       | 47         |       | 24                |       | 29                |       |
| Net proceeds from issuance of common stock  to employees and directors |       | 1,555      |       | 889               |       | 57                |       |
| Bank overdraft                                                         |       | —     |       | —            |       | 172               |       |
| Repayment of bank overdraft                                            |       | —     |       | (288              | )          | —            |       |
| Financing activities of discontinued  operations                       |       | —     |       | —            |       | (97               | )          |
|                                                                   |       |       |       |              |       |              |       |
| Net cash flows used in financing activities                            |       | (4,662     | )          | (897              | )          | (1,267            | )          |
|                                                                   |       |       |       |              |       |              |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                      |       | (123       | )          | 88                |       | 134               |       |
|                                                                   |       |       |       |              |       |              |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   |       | 3,359      |       | 1,882             |       | (636              | )          |
|                                                                   |       |       |       |              |       |              |       |
| CASH AND CASH EQUIVALENTS, beginning of the  period                    |       | 2,404      |       | 522               |       | 1,158             |       |
|                                                                   |       |       |       |              |       |              |       |
| CASH AND CASH EQUIVALENTS, end of the  period                          |       | $          | 5,763      |              | $          | 2,404             |       | $ | 522 |   |
|                                                                   |       |       |       |              |       |              |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                      |       |       |       |              |       |              |       |
| Cash paid during the period for -                                      |       |       |       |              |       |              |       |
| Interest                                                               |       | $          | 279        |              | $          | 422               |       | $ | 548 |   |
| Income taxes                                                           |       | $          | 2,502      |              | $          | 215               |       | $ | 759 |   |
|                                                                   |       |       |       |              |       |              |       |
| NON-CASH FINANCING ACTIVITY:                                           |       |       |       |              |       |              |       |
| Conversion of SNPE convertible subordinated  note into common stock    |       | $          | 1,200      |              | $          | —            |       | $ | — |   |

 

The accompanying notes are anintegral part

of these ConsolidatedFinancial Statements.

 

42

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DYNAMIC MATERIALS CORPORATION AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2005

 

(Dollars in Thousands, Except Per Share Data)

 

(1)           ORGANIZATION AND BUSINESS

 

DynamicMaterials Corporation (the “Company”) was incorporated in the state of Coloradoin 1971, and reincorporated in the state of Delaware during 1997, to provideproducts and services requiring explosive metalworking. The Company isheadquartered in Boulder, Colorado and has manufacturing facilities in theUnited States, France and Sweden. Customers are located throughout NorthAmerica, Western Europe, Australia and the Far East. The Company currentlyoperates under two business segments – Explosive Metalworking, in which metalsare metallurgically joined or altered by using explosives; and AMK Welding,which utilizes a number of welding technologies to weld components formanufacturers of jet engines and ground-based turbines. The Company’swholly-owned subsidiary, Nobelclad Europe S.A. (“Nobelclad”), was acquiredduring 2001 from an affiliate of the Company’s parent.

 

Stock Split

 

OnSeptember 23, 2005, the Company announced that its Board of Directors approveda 2-for-1 split of the Company’s common stock. The split was effected as astock dividend, and was paid to stockholders of record as of the close ofbusiness on October 5, 2005. Stockholders on the record date received oneadditional share of common stock for each share held. The payment date wasOctober 12, 2005. All share and per share data in the consolidated financialstatements and notes have been adjusted and restated to reflect the stock splitas if it had taken place at the beginning of each period presented.

 

Transaction with SNPE, Inc.

 

OnJune 14, 2000, the Company’s stockholders approved a Stock Purchase Agreement(“the Agreement”) between the Company and SNPE, Inc. (“SNPE”), a wholly ownedsubsidiary of SNPE S.A. (Groupe SNPE). The closing of the transaction, whichwas held immediately following stockholder approval, resulted in a payment fromSNPE of $5,800 to the Company in exchange for 4,218,182 shares of the Company’scommon stock at a price of $1.375 per share causing SNPE to become a 50.8%stockholder of the Company on the closing date. In addition, the Companyborrowed $1,200 under a convertible subordinated note from SNPE. The Companyalso borrowed $3,500 under a credit facility with SNPE (see Note 3). As ofDecember 31, 2005, SNPE owned 5,926,982 shares or 50.4% of the Company’s commonstock.

 

(2)                                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

TheConsolidated Financial Statements include the accounts of the Company and asubsidiary in which it has a greater than 50% interest. All significantintercompany accounts, profits and transactions have been eliminated inconsolidation.

 

Use of Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities

 

43

----

 

and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom these estimates.

 

Foreign Operations and Foreign Exchange Rate Risk

 

Thefunctional currency for the Company’s foreign operations is the applicablelocal currency for each affiliate company. Assets and liabilities of foreignsubsidiaries for which the functional currency is the local currency aretranslated at exchange rates in effect at period-end, and the statements of operationsare translated at the average exchange rates during the period. Exchange ratefluctuations on translating foreign currency financial statements into U.S.dollars that result in unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income. Transactions denominated in currencies other than thelocal currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from the Company’s operations in foreign countries are translated atactual exchange rates when known, or at the average rate for the period. As aresult, amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not agree to changes in the correspondingbalances in the Consolidated Balance Sheets. The effects of exchange ratechanges on cash balances held in foreign currencies are reported as a separateline item below cash flows from financing activities.

 

Cash and Cash Equivalents

 

Forpurposes of the financial statements, the Company considers highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.

 

Marketable securities

 

Marketablesecurities are comprised entirely of investment grade variable rate debtobligations, which are asset backed and categorized as available for sale.Accordingly, these investments are recorded at cost, which approximates fairvalue due to their variable interest rates, which typically reset every 7 days.The Company has the ability to quickly liquidate these investments despitetheir long-term stated contractual maturities. As a result of the variableinterest rates, the Company had no cumulative gross unrealized or realized holdinggains or losses on these investments. All income generated from thesesecurities was recorded as interest income.

 

Inventories

 

Inventoriesare stated at the lower-of-cost (first-in, first-out) or market value. Costelements included in inventory are material, labor, subcontract costs andfactory overhead. Inventories consist of the following at December 31,2005 and 2004:

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw  materials  |       | $        | 5,767      |     | $          | 3,619 |   |
| Work-in-process |       | 5,878    |       | 4,049    |       |
| Supplies        |       | 224      |       | 332      |       |
|            |       |     |       |     |       |
|            |       | $        | 11,869     |     | $          | 8,000 |   |
|                 |            |          |            |          |            |  |  |  |  |

 

Shippingand handling costs incurred by the Company upon shipment to customers areincluded in cost of products sold in the accompanying Consolidated Statementsof Operations.

 

44

----

 

Property, Plant and Equipment

 

Property,plant and equipment are recorded at cost. Additions, improvements andbetterments are capitalized when incurred. Maintenance and repairs are chargedto operations as the costs are incurred. Depreciation is computed using thestraight-line method over the estimated useful life of the related asset(except leasehold improvements which are depreciated over the shorter of theestimated useful life or the lease term) as follows:

 
| Building and improvements                   |   | 15-30 years |   |
|---------------------------------------------|--------|-------------|--------|
| Manufacturing  equipment and tooling        |   | 3-15 years  |   |
| Furniture,  fixtures and computer equipment |   | 3-10 years  |   |
| Other                                       |   | 7-10 years  |   |

 

Property,plant and equipment consists of the following at December 31, 2005 and2004:

 
| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Land                                        |       | $        | 570        |     | $          | 609 |   |
| Building and  improvements                  |       | 8,032    |       | 8,038    |       |
| Manufacturing  equipment and tooling        |       | 10,901   |       | 9,269    |       |
| Furniture,  fixtures and computer equipment |       | 2,776    |       | 2,614    |       |
| Other                                       |       | 356      |       | 302      |       |
|                                        |       |     |       |     |       |
|                                        |       | $        | 22,635     |     | $          | 20,832 |   |

 

AssetImpairments

 

The Company reviews itslong-lived assets and certain identifiable intangibles to be held and used bythe Company for impairment whenever events or changes in circumstances indicatetheir carrying amount may not be recoverable. In so doing, the Companyestimates the future net cash flows expected to result from the use of theasset and its eventual disposition. If the sum of the expected future net cashflows (undiscounted and without interest charges) is less than the carryingamount of the asset, an impairment loss is recognized to reduce the asset toits estimated fair value. Otherwise, an impairment loss is not recognized.Long-lived assets and certain identifiable intangibles to be disposed of, ifany, are reported at the lower of carrying amount or fair value less cost tosell.

 

Goodwill

 

Goodwillrepresents the excess of acquisition costs over the fair value of net assets ofbusinesses acquired. Under Statement of Financial Accounting Standards No. 142,goodwill is no longer required to be amortized; however, the carrying value ofgoodwill must be tested annually for impairment. The Company’s policy is totest goodwill in the fourth quarter of each year unless circumstances indicatean impairment during an intervening period.

 

CustomerAdvances

 

Onoccasion, the Company requires customers to make advance payments prior to theshipment of the related orders in order to keep customers at acceptable creditlimit levels. As of December 31, 2005 and 2004, customer advances totaled$1,885 and $1,232, respectively, and consist of advance payments from severalcustomers.

 

RevenueRecognition

 

Salesof clad metal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require us to providecertifications relative to metals used, services performed and the results ofany non-destructive testing that the customer has requested be performed. Anynon-conformance issues are resolved before the product is shipped and billed.Revenue is recognized only when all four of the following criteria have beensatisfied: persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured. Forcontracts that require multiple shipments, revenue is recorded only

 

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for the units included in each individualshipment. If, as a contract proceeds toward completion, projected total cost onan individual contract indicates a potential loss, we provide currently forsuch anticipated loss.

 

Net Income (Loss) Per Share

 

Basicearnings per share (“EPS”) is computed by dividing net income (loss) by theweighted average number of shares of common stock outstanding during theperiod. Diluted EPS recognizes the potential dilutive effects of dilutive securities.The following represents a reconciliation of the numerator and denominator usedin the calculation of basic and diluted EPS:

 
| ** **                                                    | ** ** | **For the year ended December 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Income**                               | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic  earnings per share:                                    |       |                                     |       |   |   |   |   |
| Net income                                                    |       | $                                        | 10,372     |   | 11,290,053 |   | $ | 0.92 |   |
|                                                          |       |                                     |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                   |       | 622,584 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | 23                                       |       | 174,247 |   |   |   |
|                                                          |       |                                     |       |   |   |   |   |
| Dilutive  earnings per share:                                 |       |                                     |       |   |   |   |   |
| Net income                                                    |       | $                                        | 10,395     |   | 12,086,884 |   | $ | 0.86 |   |

 
| ** **                                                    | ** ** | **For the year ended December 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Income**                               | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic  earnings per share:                                    |       |                                     |       |   |   |   |   |
| Net income                                                    |       | $                                        | 2,833      |   | 10,269,080 |   | $ | 0.28 |   |
|                                                          |       |                                     |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                   |       | 299,010 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | 50                                       |       | 400,000 |   |   |   |
|                                                          |       |                                     |       |   |   |   |   |
| Dilutive  earnings per share:                                 |       |                                     |       |   |   |   |   |
| Net income                                                    |       | $                                        | 2,883      |   | 10,968,090 |   | $ | 0.27 |   |

 
| ** **                                                    | ** ** | **For the year ended December 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Income**                               | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic  earnings per share:                                    |       |                                     |       |   |   |   |   |
| Net loss                                                      |       | $                                        | (708       | ) | 10,134,648 |   | $ | (0.07 | ) |
|                                                          |       |                                     |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                   |       | 86,964 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | 50                                       |       | 400,000 |   |   |   |
|                                                          |       |                                     |       |   |   |   |   |
| Dilutive  earnings per share:                                 |       |                                     |       |   |   |   |   |
| Net loss                                                      |       | $                                        | (658       | ) | 10,621,612 |   | $ | (0.06 | ) |

 

Fair Value of Financial Instruments

 

Thecarrying value of cash and cash equivalents, marketable securities, tradeaccounts receivable and payable, accrued expenses and notes receivable areconsidered to approximate fair value due to the short-term nature of these

 

46

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instruments. The fair value of the Company’slong-term debt is estimated to approximate carrying value based on theborrowing rates currently available to the Company for bank loans with similarterms and average maturities.

 

Income Taxes

 

TheCompany recognizes deferred tax assets and liabilities for the expected futureincome tax consequences based on enacted tax laws of temporary differencesbetween the financial reporting and tax bases of assets and liabilities. TheCompany recognizes deferred tax assets for the expected future effects of alldeductible temporary differences. Deferred tax assets are then reduced, ifdeemed necessary, by a valuation allowance for the amount of any tax benefitswhich, more likely than not based on current circumstances, are not expected tobe realized (see Note 5).

 

Related Party Transactions

 

TheCompany has a sales commission agreement with Clad Metal Products, Inc, whichis 100% owned by an executive officer of the Company. Under this agreement,which was terminated in 2005, the Company paid Clad Metal Products, Inc. 20% ofthe commissions that it earned on sales of certain non-explosion clad products.During the years ended December 31, 2005, 2004 and 2003, the Company paidcommissions of $13, $7 and $10, respectively related to this agreement.

 

Nobelcladpurchases explosives used in its cladding operation from Nobel ExplosifsFrance, which is a wholly owned subsidiary of Groupe SNPE. For the years endedDecember 31, 2005, 2004 and 2003, these purchases totaled $820, $739, and $445,respectively. Accounts payable as of December 31, 2005 and 2004 includeoutstanding amounts of $229 and $298, respectively, relating to thesepurchases.

 

Concentration of Credit Risk

 

Financialinstruments, which potentially subject the Company to a concentration of creditrisk, consist primarily of cash, restricted cash, cash equivalents and accountsreceivable. Generally, the Company does not require collateral to securereceivables. At December 31, 2005 the Company has no significant financialinstruments with off-balance sheet risk of accounting losses, such as optionscontracts or other foreign currency hedging arrangements.

 

Other Cumulative Comprehensive Income

 

Othercumulative comprehensive income as of December 31, 2005, 2004 and 2003consisted of the following:

 
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Currency  translation adjustment |       | $        | 485        |     | $          | 1,300    |       | $ | 890 |   |
| Derivative  valuation adjustment |       | —   |       | —   |       | (43      | )          |
|                             |       |     |       |     |       |     |       |
|                             |       | $        | 485        |     | $          | 1,300    |       | $ | 847 |   |

 

Stock Based Compensation

 

The Company has elected tofollow Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”), andrelated interpretations in accounting for its employee stock options, includingStatement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation – Transition and Disclosure*(“SFAS 148”). Under APB 25, because the exercise price of the Company’semployee stock options is generally equal to the market price of the underlyingstock on the date of the grant, no compensation expense is recognized.Statement of Financial Accounting Standards No. 123, *Accounting and Disclosure of Stock-Based Compensation* (“SFAS123”), establishes an alternative method of expense recognition for stock-basedcompensation awards to employees that is based on fair values. The Companyelected not to adopt SFAS 123 for expense recognition purposes.

 

47

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Pro-formainformation regarding net income and earnings per share is required by SFAS123, and has been determined as if the Company had accounted for its employeestock options and employees stock purchase plan under the fair value method ofSFAS 123. The fair value for these options was estimated at the date of grantusing a Black-Scholes option pricing model with the following weighted-averageassumptions:

 
| ** **               | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                     |       |      |       |      |       |      |       |
| Risk-free  interest rate |       | 3.7       | %          | 3.1       | %          | 2.7       | %          |
| Expected  lives          |       | 4.0 years |       | 4.0 years |       | 4.0 years |       |
| Expected  volatility     |       | 91.1      | %          | 79.0      | %          | 83.2      | %          |
| Expected  dividend yield |       | 0.5       | %          | 0.0       | %          | 0.0       | %          |

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including expected stock price characteristicssignificantly different from those of traded options. Because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

Theweighted average fair value of options granted during 2005, 2004 and 2003 was$6.43, $1.03, and $.80, respectively. For purposes of pro-forma disclosures,the estimated fair value of the options is amortized to expense over theoptions’ vesting periods. The Company’s pro-forma net income (loss) andpro-forma net income (loss) per share, as if the Company had used the fairvalue accounting provisions of SFAS 123, are shown below.

 
| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income  (loss):                          |       |     |       |     |       |     |       |
| As reported                                  |       | $        | 10,372     |     | $          | 2,833    |       | $ | (708 | ) |
| Expense calculated under                     |       |     |       |     |       |     |       |
| SFAS 123, net of tax effect                  |       | (481     | )          | (250     | )          | (209     | )          |
|                                         |       |     |       |     |       |     |       |
| Pro forma                                    |       | $        | 9,891      |     | $          | 2,583    |       | $ | (917 | ) |
|                                         |       |     |       |     |       |     |       |
| Basic net  income (loss) per common share:   |       |     |       |     |       |     |       |
| As reported                                  |       | $        | 0.92       |     | $          | 0.28     |       | $ | (0.07 | ) |
| Pro forma                                    |       | $        | 0.88       |     | $          | 0.25     |       | $ | (0.09 | ) |
|                                         |       |     |       |     |       |     |       |
| Diluted net  income (loss) per common share: |       |     |       |     |       |     |       |
| As reported                                  |       | $        | 0.86       |     | $          | 0.27     |       | $ | (0.06 | ) |
| Pro forma                                    |       | $        | 0.82       |     | $          | 0.24     |       | $ | (0.08 | ) |

 

Recent Accounting Pronouncements

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*(“SFAS123R”), which is a revision of SFAS 123. SFAS 123R supersedes APB 25 and amendsStatement of Financial Accounting Standards No. 95, *Statement of Cash Flows*. Generally the approach in SFAS 123Ris similar to the approach described in SFAS 123. However, SFAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma disclosure is no longer an option. In addition, SFAS 123R

 

48

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requires any excess tax benefits receivedupon exercise of options to be presented as a financing activity on thestatement of cash flows rather than as an operating activity as it is currentlypresented.

 

The Company will adopt SFAS 123R in the firstquarter of 2006 using the modified prospective method and is currentlyevaluating the effect that the adoption will have on its financial position andresults of operations. The Company has preliminarily estimated that the impactof adoption will result in a reduction in full year 2006 net earnings equal toapproximately $0.04 to $0.06 per diluted share.

 

In November 2004, the FASB issued SFAS 151, *Inventory Costs*, which amends the guidancein Accounting Research Bulletin No. 43, Chapter 4, *Inventory Pricing*. This statement requires abnormal amountsof idle facility expense, freight, handling costs and wasted material to beexcluded from inventory costing and instead included as period expenses. Inaddition, this standard requires the allocation of fixed production overhead tobe based on normal capacity of the production facilities. The Company does notbelieve the adoption of this standard on January 1, 2006 will have asignificant impact on its results of operations.

 

In May 2005, the FASB issued SFAS 154, *Accounting Changes and Error Corrections*,which requires the direct effects of voluntary accounting principle changes tobe retrospectively applied to prior periods’ financial statements. ThisStatement does not change the transition provisions of any existing accountingpronouncements, but would apply in the unusual instance that a pronouncementdoes not include specific transition provisions. SFAS No. 154 maintainsexisting guidance with respect to accounting estimate changes and correctionsof errors. The Statement is effective for the Company beginning on January 1,2006. Adoption is not expected to have a material impact on the Company’sfinancial position, results of operation or cash flows.

 

Reclassifications

 

Certain prior year balances in the consolidatedfinancial statements and notes have been reclassified to conform with the 2005presentation.

 

Revisions to Consolidated Statements of Cash Flows

 

In2005, the Company has separately disclosed the operating, investing andfinancing portions of the cash flows related to its discontinued operations,which had previously been reported on a combined basis as a single amount.

 

(3)           DEBT

 

Relatedparty debt consists of the following at December 31, 2005 and 2004:

 
| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| SNPE S.A.  line of credit           |       | $        | 45         |     | $          | 134 |   |
| SNPE convertible  subordinated note |       | —   |       | 1,200    |       |
| SNPE S.A.  term loan                |       | —   |       | 667      |       |
|                                |       |     |       |     |       |
| Related  party debt (all current)   |       | $        | 45         |     | $          | 2,001 |   |

 

49

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Long-term debt consists of the following at December 31, 2005 and 2004:

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Term loan -  French bank              |       | $        | 1,029      |     | $          | 1,581 |   |
| Industrial  development revenue bonds |       | 1,720    |       | 2,510    |       |
|                                  |       |     |       |     |       |
|                                  |       | 2,749    |       | 4,091    |       |
| Less current  maturities              |       | (528     | )          | (1,185   | )          |
|                                  |       |     |       |     |       |
| Long-term  debt                       |       | $        | 2,221      |     | $          | 2,906 |   |

 

BankLines of Credit

 

In September 2005, theCompany entered into a new $7,500 credit facility with Wells Fargo Bank,National Association (“the Bank”). The credit facility, which expires on June30, 2007, replaces the $6,000 credit facility between the Company and WellsFargo Business Credit Inc. (an affiliate of the Bank) that terminatedconcurrently with signing the new credit facility. The new credit facilityallows for Euro-denominated advances up to a $2,000 equivalent.Dollar-denominated advances bear interest at either the Bank’s prime rate less0.5% (6.75% as of December 31, 2005) or LIBOR plus 2% (the rate selection is atthe Company’s option subject to certain conditions). Euro-denominated advancesbear interest at EURIBOR plus 2% (4.36% as of December 31, 2005). Borrowings onthe credit facility are secured by accounts receivable, inventory and anyequipment acquired after the date of the agreement. There were no borrowingsoutstanding on the credit facility as of December 31, 2005.

 

Inaddition, the Company maintains a 4,000 Swedish Krona line of credit ($503based upon the December 31, 2005 exchange rate) with a Swedish bank for itsNitro Metall operations. As of December 31, 2005, there were no outstandingborrowings under this line of credit. Borrowings under the line of credit aresecured by real estate used in Nitro Metall’s operations. This line of creditcarries an interest rate equal to the basic rate stipulated by the Central Bankof Sweden (“Repo Rate”), which was 1.5% as of December 31, 2005.

 

SNPE S.A. Line of Credit

 

TheCompany’s subsidiary, Nobelclad, has a line of credit or “cash agreement” withGroupe SNPE that provides for up to 2 million Euros ($2,369 based upon theDecember 31, 2005 exchange rate) in cash advances to meet the working capitalneeds of Nobelclad. As of December 31, 2005, the line of credit had anoutstanding balance of 38 Euros ($45 based upon the December 31, 2005 exchangerate) and bears interest at EURIBOR plus 1.5%. The line expires on December 31,2006 but is subject to annual renewal by the parties. The agreementautomatically terminates if Groupe SNPE loses its indirect control ofNobelclad. The interest rate on outstanding borrowings as of December 31, 2005was 3.86%.

 

SNPE Convertible Subordinated Note

 

Inconnection with the SNPE transaction (see Note 1), a cash payment was made bySNPE to the Company to purchase a five-year, 5% Convertible Subordinated Note(“Subordinated Note”). SNPE had the option to convert the $1,200 SubordinatedNote into common stock of the Company at a conversion price of $3 per share atany time up to, and including the maturity date (June 14, 2005). If the notewas not converted, the entire principal balance would be due at the maturitydate. On June 8, 2005, SNPE. exercised its conversion rights on the ConvertibleSubordinated Note. In accordance with the provisions of the note, the $1,200note was converted into 400,000 shares of common stock of the Company at aconversion rate of $3 per share.

 

50

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SNPES.A. Term Loan

 

Inconnection with its July 3, 2001 acquisition of Nobelclad, the Company enteredinto a $4,000 term loan agreement with Groupe SNPE. The term loan was securedby a pledge of 65% of the capital stock of Nobelclad held by the Company. The termloan accrued interest at the Federal Funds Rate plus 3.0%, payable quarterly.Commencing September 30, 2002 and on the last day of each calendar quarterthereafter, principal payments of $333 were due, with the final principalpayment of $333 being due on June 30, 2005. The Company repaid the outstandingbalance on the term loan on March 30, 2005.

 

Term Loan – French Bank

 

InJune 2001, Nobelclad obtained a term loan with a French bank that provides forborrowings of 1,448 Euros ($1,715 based upon the December 31, 2005 exchangerate), of which 869 Euros ($1,029) was outstanding as of December 31, 2005.Borrowings under the term loan bear interest at EURIBOR plus 0.4%. The interestrate on outstanding borrowings as of December 31, 2005 was 2.76%. Beginning onJune 21, 2004 and on each anniversary date thereafter until final maturity onJune 21, 2008, principal payments of 290 Euros are required. The bank has theoption of demanding early repayment of any outstanding loans if Groupe SNPE’sindirect ownership of Nobelclad falls below 50%.

 

Industrial Development Revenue Bonds

 

DuringSeptember 1998, the Company began construction on a new manufacturing facilityin Fayette County, Pennsylvania. This project was financed with proceeds fromindustrial development revenue bonds issued by the Fayette County IndustrialDevelopment Authority. The loan bears interest at a variable rate which is setweekly based on the current weekly market rate for tax-exempt bonds. Theinterest rate at December 31, 2005 was 3.66%. Principal payments, which vary inamount, are paid on a quarterly basis throughout the life of the bonds. TheCompany has established a bank letter of credit in the trustee’s favor for theprincipal amount of outstanding bonds. The Company may redeem the bonds priorto their final maturity on September 1, 2013 at an amount equal to theoutstanding principal plus any accrued interest. Annual principal repayments,which totaled $790 in 2005, will range from $185 to $300 annually until finalmaturity.

 

Loan Covenants and Restrictions

 

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the payment of dividends or other distributions tostockholders, redemption of capital stock, incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios. As of December 31,2005, the Company was in compliance with all financial covenants and otherprovisions of its debt agreements.

 

ScheduledDebt Maturity

 

The Company’s long-term debtmatures as follows:

 
| **Year ended December 31-** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2006                                       |       | $          | 528        |   |
| 2007                                       |       | 543        |       |
| 2008                                       |       | 563        |       |
| 2009                                       |       | 235        |       |
| 2010                                       |       | 255        |       |
| Thereafter                                 |       | 625        |       |
|                                       |       |       |       |
|                                       |       | $          | 2,749      |   |

 

51

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(4)           COMMON STOCK OPTIONS AND BENEFITPLAN

 

Stock Option Plan

 

TheCompany maintains a stock option plan that provides for grants of bothincentive stock options and non-statutory stock options. Incentive stockoptions are granted at exercise prices that equal the fair market value at dateof grant based upon the closing sales price of the Company’s common stock onthat date. Incentive stock options generally vest 25% annually and expire tenyears from the date of grant. Non-statutory stock options are granted atexercise prices that range from 85% to 100% of the fair market value of thestock at date of grant. These options vest over periods ranging from one tofour years and have expiration dates ten years from the date of grant. Under theCompany’s stock option plan, 2,250,000 shares of common stock are authorizedfor option grants, of which 38,074 remain available for future grants as ofDecember 31, 2005.

 

Asummary of stock option activity for the years ended December 31, 2005,2004 and 2003 is as follows:

 
| ** **                        | ** ** | **2005**    | ** ** | **2004**     | ** ** | **2003**    | ** ** |
|-----------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                        | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | ** **  | ** ** | **Average**  | ** ** | ** **  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | ** **  | ** ** | **Exercise** | ** ** | ** **  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                        | ** ** | **Options** | ** ** | **Price**    | ** ** | **Options** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| Outstanding  at beginning of year |       | 1,052,922   |       | $            | 1.89       |        | 1,408,496  |   | $ | 1.92 |   | 1,200,996 |   | $ | 2.03 |   |
| Granted                           |       | 246,754     |       | $            | 9.39       |        | 153,672    |   | $ | 1.58 |   | 232,000 |   | $ | 1.30 |   |
| Cancelled                         |       | (4,000      | )          | $            | 4.87       |        | (85,500    | ) | $ | 1.34 |   | (14,500 | ) | $ | 1.35 |   |
| Exercised                         |       | (707,250    | )          | $            | 2.10       |        | (423,746   | ) | $ | 1.98 |   | (10,000 | ) | $ | 1.13 |   |
|                              |       |        |       |         |       |        |       |   |   |   |   |   |   |
| Outstanding  at end of year       |       | 588,426     |       | $            | 4.77       |        | 1,052,922  |   | $ | 1.89 |   | 1,408,496 |   | $ | 1.92 |   |
|                              |       |        |       |         |       |        |       |   |   |   |   |   |   |
| Exercisable  at end of year       |       | 182,922     |       | $            | 1.52       |        | 604,000    |   | $ | 2.25 |   | 851,628 |   | $ | 2.32 |   |

 

Thefollowing table summarizes information about employee stock options outstandingand exercisable at December 31, 2005:

 
| ** **        | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **        | ** ** | **Number of**           | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Options**                  | ** ** | **Average**                  | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| **Range of** | ** ** | **Outstanding at**      | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | **Exercisable at** | ** ** | **Weighted** | ** ** |
| **Exercise**      | ** ** | **December 31,**        | ** ** | **Contractual Life**    | ** ** | **Average** | ** ** | **December 31,** | ** ** | **Average** | ** ** |
| **Prices**        | ** ** | **2005**                     | ** ** | **in Years**            | ** ** | **Exercise Price** | ** ** | **2005** | ** ** | **Exercise Price** | ** ** |
|              |       |                         |       |                         |       |   |   |   |   |   |   |
| $1.13 - $1.89     |       | 345,672                      |       | 7.28                         |       | $ | 1.48 |   | 182,922 |   | $ | 1.52 |   |
| $4.87 - $4.87     |       | 172,000                      |       | 9.06                         |       | $ | 4.87 |   | — |   | $ | 0.00 |   |
| $20.62            |       | 70,754                       |       | 9.42                         |       | $ | 20.62 |   | — |   | $ | 0.00 |   |
|              |       |                         |       |                         |       |   |   |   |   |   |   |
| $1.13 - $20.62    |       | 588,426                      |       | 8.06                         |       | $ | 4.77 |   | 182,922 |   | $ | 1.52 |   |

 

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Employee Stock Purchase Plan

 

TheCompany has an Employee Stock Purchase Plan (“ESPP”) which is authorized toissue up to 450,000 shares. The offerings begin on the first day following eachprevious offering (“Offering Date”) and end six months from the offering date(“Purchase Date”). The ESPP provides that full time employees may authorize theCompany to withhold up to 15% of their earnings, subject to certainlimitations, to be used to purchase common stock of the Company at the lesserof 85% of the fair market value of the Company’s common stock on the OfferingDate or the Purchase Date. In connection with the ESPP, 10,794, 39,362 and44,988 shares of the Company’s stock were purchased during the years endedDecember 31, 2005, 2004 and 2003, respectively. The pro forma net incomecalculation in Note 2 reflects $35, $25 and $19 in compensation expenseassociated with the ESPP for 2005, 2004 and 2003, respectively.

 

401(k) Plan

 

TheCompany offers a contributory 401(k) plan to its employees. The Company makesmatching contributions equal to 100% of each employee’s contribution up to 3%and 50% of the next 2% contributed by each employee. Total Companycontributions were $184, $203 and $264 for the years ended December 31,2005, 2004 and 2003, respectively.

 

(5)           INCOME TAXES

 

Thedomestic and foreign components of income before tax for the Company’scontinuing operations for the year ended December 31 are summarized below:

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | 10,530     |     | $          | 5,541    |       | $ | 2,839 |   |
| Foreign    |       | 5,075    |       | 823      |       | (50      | )          |
|       |       |     |       |     |       |     |       |
|       |       | $        | 15,605     |     | $          | 6,364    |       | $ | 2,789 |   |

 

Thecomponents of the provision for income taxes for the Company’s continuingoperations for the years ended December 31 are as follows:

 
| ** **          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Current -  Federal  |       | $        | 4,631      |     | $          | 198      |       | $ | 118 |   |
| Current -  State    |       | 349      |       | 40       |       | —   |       |
| Current -  Foreign  |       | 1,705    |       | 232      |       | 57       |       |
|                |       |     |       |     |       |     |       |
|                |       | 6,685    |       | 470      |       | 175      |       |
|                |       |     |       |     |       |     |       |
| Deferred -  Federal |       | (1,283   | )          | 1,242    |       | 1,187    |       |
| Deferred -  State   |       | (183     | )          | 183      |       | 175      |       |
| Deferred -  Foreign |       | 14       |       | 66       |       | (33      | )          |
|                |       |     |       |     |       |     |       |
|                |       | (1,452   | )          | 1,491    |       | 1,329    |       |
|                |       |     |       |     |       |     |       |
|                |       | $        | 5,233      |     | $          | 1,961    |       | $ | 1,504 |   |

 

53

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Areconciliation of the Company’s income tax provision for continuing operationscomputed by applying the Federal statutory income tax rate of 35% in 2005 and34% in 2004 and 2003 to income before taxes for the year ended December 31 isas follows:

 

| ** **                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  income tax at statutory rate                            |       | $        | 5,463      |     | $          | 2,164    |       | $ | 949 |   |
| State tax  items, net                                            |       | 523      |       | 272      |       | 144      |       |
| Effect of  difference between U.S. Federal and Foreign tax rates |       | (119     | )          | 18       |       | 2        |       |
| Permanent  differences                                           |       | 924      |       | (80      | )          | 11       |       |
| Tax on foreign  dividend received                                |       | —   |       | —   |       | 324      |       |
| Tax credits  related to the amendment of prior year tax returns  |       | (706     | )          | (413     | )          | 74       |       |
| Current year  tax credits                                        |       | (934     | )          | —   |       | —   |       |
| Changes in  valuation allowance                                  |       | 177      |       | —   |       | —   |       |
| Other                                                            |       | (95      | )          | —   |       | —   |       |
|                                                             |       |     |       |     |       |     |       |
| Provision  for income taxes                                      |       | $        | 5,233      |     | $          | 1,961    |       | $ | 1,504 |   |

 

54

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TheCompany’s deferred tax assets and liabilities at December 31, 2005 and2004 consist of the following:

 
| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                              |       |     |       |     |       |
| Income tax credit carryforward                     |       | $        | 2,106      |     | $          | 624 |   |
| State net operating loss carryforward              |       | 120      |       | —   |       |
| Inventory                                          |       | 84       |       | 107      |       |
| Allowance for doubtful accounts                    |       | 86       |       | 69       |       |
| Repair reserve                                     |       | 183      |       | 23       |       |
| Vacation and other compensation accrual            |       | 149      |       | 176      |       |
| Other                                              |       | 70       |       | 61       |       |
|                                               |       |     |       |     |       |
| Deferred tax assets                                |       | 2,798    |       | 1,060    |       |
|                                               |       |     |       |     |       |
| Deferred tax  liabilities:                         |       |     |       |     |       |
| Depreciation and amortization                      |       | (1,230   | )          | (1,134   | )          |
| Foreign income taxable in future periods           |       | (195     | )          | (219     | )          |
|                                               |       |     |       |     |       |
| Deferred tax liabilities                           |       | (1,425   | )          | (1,353   | )          |
|                                               |       |     |       |     |       |
| Net deferred  tax assets / (liabilities)           |       | 1,373    |       | (293     | )          |
| Valuation  allowance                               |       | (177     | )          | —   |       |
|                                               |       |     |       |     |       |
| Net deferred  tax assets / (liabilities)           |       | $        | 1,196      |     | $          | (293 | ) |
|                                               |       |     |       |     |       |
|                                               |       |     |       |     |       |
| Net current  deferred tax assets                   |       | $        | 572        |     | $          | 436 |   |
| Net long-term  deferred tax assets / (liabilities) |       | 624      |       | (729     | )          |
|                                               |       |     |       |     |       |
|                                               |       | $        | 1,196      |     | $          | (293 | ) |

 

Asa result of stock option activity in 2005 and 2004, the Company recorded taxbenefits of $3,728 and $311, respectively, directly to additional paid incapital. Thus, these tax benefits, which reduce taxes currently payable, arenot reflected in the current income tax provision for those years.

 

Duringthe year ended December 31, 2005, the Company completed an analysis of prioryear tax credits and related items. As a result of the analysis, the Companyfiled amended federal and state income tax returns. The amended state returnsreported additional net operating losses and credits above the amounts theCompany had previously recorded on its books and records. In assessing theseadditional losses and credits, the Company determined that the utilization of aportion of these was not probable, due to potential changes in the states inwhich the Company has income tax nexus. Thus, the Company recorded a netvaluation allowance of approximately $177 against the deferred tax assetsduring the year ended December 31, 2005.

 

Asof December 31, 2005 and 2004, income considered to be permanently reinvestedin non-U. S. subsidiaries totaled approximately $5,407 and $3,628, respectively.Deferred income taxes have not been provided on this undistributed income, asthe Company does not plan to initiate any action that would require the paymentof U. S. income taxes on these earnings. It is not practical to estimated theamount of additional tax that might be payable on these amounts ofundistributed foreign income. As a result of providing current Federal incometaxes on the remaining undistributed foreign earnings as of December 31, 2005,$904 is included in permanent differences reported in the above income tax ratereconciliation for 2005. A related foreign tax credit of $904 was also recordedas a result of providing

 

55

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income taxes on the remaining undistributedforeign earnings. This credit is reflected in the current year tax credits inthe above income tax rate reconciliation and in the income tax creditcarryforward in the above schedule of deferred tax assets and liabilities as ofDecember 31, 2005.

 

Thecomponents of the income tax credit carryforward as of December 31, 2005 are$904 of foreign tax credits noted above, additional foreign tax credits of $365(which, if unused, expire in 2012 and 2013), research related tax credits of$701 (which expire beginning in 2013), and alterative minimum tax credits of$136 (with no statutory expiration). The income tax credit carryforward as ofDecember 31, 2004 is comprised of foreign tax credits of $92, research relatedtax credits of $300, and alterative minimum tax credits of $232.

 

Asof December 31, 2005, the Company has state net operating loss carryforwards ofapproximately $2,635. Portions of these carryforwards, if unused, will expirebeginning at the end of 2006 with the last portion due to expire in 2023.

 

(6)           BUSINESS SEGMENTS

 

TheCompany is organized in the following two segments:  the Explosive Metalworking segment and AMKWelding. The Explosive Metalworking segment uses explosives to perform metalcladding and shock synthesis. The most significant product of this group is cladmetal which is used in the fabrication of pressure vessels, heat exchangers andtransition joints used in the petrochemical, refining, hydrometallurgy,aluminum smelting, shipbuilding and other industries. AMK Welding utilizes a number of welding technologies toweld components for manufacturers of jet engine and ground-based turbines.

 

Historically,our Aerospace Group was comprised of the AMK Welding, Spin Forge and PMPdivisions. Since PMP and Spin Forge are now reported as discontinued operationsdue to the 2003 sale of PMP and the divestiture of Spin Forge completed onSeptember 17, 2004, the Aerospace Group no longer exists and AMK Welding isbeing reported as a stand-alone business segment. Refer to Note 8 for thedetails of these transactions.

 

Theaccounting policies of both segments are the same as those described in thesummary of significant accounting policies. The Company’s reportable segmentsare strategic business units that offer different products and services and areseparately managed. Each segment is marketed to different customer types andrequires different manufacturing processes and technologies.

 

56

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Segmentinformation is presented for the years ended December 31, 2005, 2004 and 2003as follows:

 
| ** **                                            | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                            | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| As of and  for the year ended December 31, 2005:      |       |             |       |        |       |       |       |
| Net sales                                             |       | $                | 75,582     |        | $          | 3,709      |       | $ | 79,291 |   |
| Depreciation  and amortization                        |       | $                | 1,328      |        | $          | 199        |       | $ | 1,527 |   |
| Income from  operations of continuing operations      |       | $                | 15,160     |        | $          | 608        |       | $ | 15,768 |   |
| Unallocated amounts:                                  |       |             |       |        |       |       |       |
| Other expense                                         |       |             |       |        |       | (7         | )          |
| Interest expense                                      |       |             |       |        |       | (219       | )          |
| Interest income                                       |       |             |       |        |       | 63         |       |
|                                                  |       |             |       |        |       |       |       |
| Consolidated income before income taxes               |       |             |       |        |       | $          | 15,605     |   |
| Segment  assets                                       |       | $                | 37,940     |        | $          | 2,949      |       | $ | 40,889 |   |
| Assets not  allocated to segments:                    |       |             |       |        |       |       |       |
| Cash and cash equivalents                             |       |             |       |        |       | 5,763      |       |
| Marketable securities                                 |       |             |       |        |       | 1,950      |       |
| Prepaid expenses and other                            |       |             |       |        |       | 822        |       |
| Current deferred tax assets                           |       |             |       |        |       | 572        |       |
| Deferred tax assets                                   |       |             |       |        |       | 819        |       |
| Other assets                                          |       |             |       |        |       | 76         |       |
| Other receivables related to discontinued  operations |       |             |       |        |       | 681        |       |
| Assets of discontinued operations                     |       |             |       |        |       | 3,739      |       |
| Consolidated total assets                             |       |             |       |        |       | $          | 55,311     |   |
| Capital  expenditures                                 |       | $                | 2,217      |        | $          | 631        |       | $ | 2,848 |   |

 

57

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| ** **                                            | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                            | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| As of and  for the year ended December 31, 2004:      |       |             |       |        |       |       |       |
| Net sales                                             |       | $                | 51,375     |        | $          | 2,790      |       | $ | 54,165 |   |
| Depreciation  and amortization                        |       | $                | 1,138      |        | $          | 249        |       | $ | 1,387 |   |
| Income from  operations of continuing operations      |       | $                | 6,609      |        | $          | 279        |       | $ | 6,888 |   |
| Unallocated amounts:                                  |       |             |       |        |       |       |       |
| Other income                                          |       |             |       |        |       | 7          |       |
| Interest expense                                      |       |             |       |        |       | (554       | )          |
| Interest income                                       |       |             |       |        |       | 23         |       |
| Consolidated income before income taxes               |       |             |       |        |       | $          | 6,364      |   |
| Segment  assets                                       |       | $                | 32,459     |        | $          | 2,211      |       | $ | 34,670 |   |
| Assets not  allocated to segments:                    |       |             |       |        |       |       |       |
| Cash and cash equivalents                             |       |             |       |        |       | 2,404      |       |
| Prepaid expenses and other                            |       |             |       |        |       | 527        |       |
| Current deferred tax assets                           |       |             |       |        |       | 436        |       |
| Other assets                                          |       |             |       |        |       | 128        |       |
| Other receivables related to discontinued  operations |       |             |       |        |       | 1,696      |       |
| Assets of discontinued operations                     |       |             |       |        |       | 3,892      |       |
| Consolidated total assets                             |       |             |       |        |       | $          | 43,753     |   |
| Capital  expenditures                                 |       | $                | 1,004      |        | $          | 134        |       | $ | 1,138 |   |

 
| ** **                                            | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                            | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| As of and  for the year ended December 31, 2003:      |       |             |       |        |       |       |       |
| Net sales                                             |       | $                | 33,043     |        | $          | 2,736      |       | $ | 35,779 |   |
| Depreciation  and amortization                        |       | $                | 1,038      |        | $          | 210        |       | $ | 1,248 |   |
| Income from  operations of continuing operations      |       | $                | 2,855      |        | $          | 461        |       | $ | 3,316 |   |
| Unallocated amounts:                                  |       |             |       |        |       |       |       |
| Other expense                                         |       |             |       |        |       | (19        | )          |
| Interest expense                                      |       |             |       |        |       | (518       | )          |
| Interest income                                       |       |             |       |        |       | 10         |       |
| Consolidated income before income taxes               |       |             |       |        |       | $          | 2,789      |   |
| Segment  assets                                       |       | $                | 22,878     |        | $          | 2,208      |       | $ | 25,086 |   |
| Assets not  allocated to segments:                    |       |             |       |        |       |       |       |
| Cash and cash equivalents                             |       |             |       |        |       | 522        |       |
| Accounts receivable of Spin Forge division            |       |             |       |        |       | 294        |       |
| Prepaid expenses and other                            |       |             |       |        |       | 1,208      |       |
| Current deferred tax assets                           |       |             |       |        |       | 388        |       |
| Other assets                                          |       |             |       |        |       | 389        |       |
| Other receivables related to discontinued  operations |       |             |       |        |       | 580        |       |
| Assets of discontinued operations                     |       |             |       |        |       | 6,795      |       |
| Consolidated total assets                             |       |             |       |        |       | $          | 35,262     |   |
| Capital  expenditures                                 |       | $                | 649        |        | $          | 270        |       | $ | 919 |   |

 

58

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Thegeographic location of the Company’s property, plant and equipment, net ofaccumulated depreciation, is as follows:

 
| ** **     | ** ** | **As of December 31,** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **2005**               | ** ** | **2004** | ** ** | **2003** | ** ** |
| United  States |       | $                      | 9,387      |   | $ | 8,721 |   | $ | 8,754 |   |
| France         |       | 2,751                  |       | 2,755 |   | 2,665 |   |
| Sweden         |       | 434                    |       | 368 |   | 412 |   |
|           |       |                   |       |   |   |   |   |
| Total          |       | $                      | 12,572     |   | $ | 11,844 |   | $ | 11,831 |   |

 

Allof the Company’s sales are shipped from the manufacturing locations located inthe United States, France and Sweden. The following represents the Company’snet sales based on the geographic location of the customer:

 
| ** **               | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| United  States           |       | $                                    | 32,126     |   | $ | 24,528 |   | $ | 17,879 |   |
| South Korea              |       | 7,771                                |       | 409 |   | 829 |   |
| Canada                   |       | 7,562                                |       | 4,924 |   | 4,610 |   |
| Spain                    |       | 5,369                                |       | 957 |   | 587 |   |
| Malaysia                 |       | 5,148                                |       | 83 |   | 40 |   |
| China                    |       | 3,368                                |       | 310 |   | 33 |   |
| Netherlands              |       | 2,757                                |       | 1,218 |   | 749 |   |
| Belgium                  |       | 2,495                                |       | 2,591 |   | 795 |   |
| France                   |       | 2,417                                |       | 1,662 |   | 1,424 |   |
| Italy                    |       | 2,208                                |       | 2,236 |   | 1,617 |   |
| Australia                |       | 1,940                                |       | 5,454 |   | 1,768 |   |
| Germany                  |       | 939                                  |       | 1,978 |   | 550 |   |
| Russia                   |       | 838                                  |       | 253 |   | 1,488 |   |
| Mexico                   |       | 664                                  |       | 1,241 |   | 570 |   |
| Other  foreign countries |       | 3,689                                |       | 6,321 |   | 2,840 |   |
|                     |       |                                 |       |   |   |   |   |
| Total                    |       | $                                    | 79,291     |   | $ | 54,165 |   | $ | 35,779 |   |

 

Duringthe years ended December 31, 2005, 2004 and 2003, no one customer accounted formore than 10% of total net sales.

 

(7)           COMMITMENTS AND CONTINGENCIES

 

TheCompany leases certain office space, storage space, vehicles and otherequipment under various operating lease agreements. Future minimum rentalcommitments under non-cancelable operating leases are as follows:

 

| **Year ended December 31-** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| 2006                        |       | $          | 337        |   |
| 2007                        |       | 288        |       |
| 2008                        |       | 268        |       |
| 2009                        |       | 266        |       |
| 2010                        |       | 171        |       |
| Thereafter                  |       | 155        |       |
|                        |       |       |       |
|                        |       | $          | 1,485      |   |
|                             |            |            |            |  |  |

 

59

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Totalrental expense included in operations was $603, $529 and $347 for the yearsended December 31, 2005, 2004 and 2003, respectively.

 

Inthe normal course of business, the Company is a party to various contractualdisputes and claims. After considering the Company’s evaluations by legalcounsel regarding pending actions, management is of the opinion that theoutcome of such actions will not have a material adverse effect on thefinancial position or results of operations of the Company.

 

(8)           DISCONTINUED OPERATIONS

 

OnOctober 7, 2003, DMC completed the sale of its PMP division. The sales pricewas $580 and was financed through the issuance of a promissory note payablethat had been fully repaid as of December 31, 2004. The sale included theinventory and property, plant and equipment of PMP.

 

OnSeptember 17, 2004, DMC completed the divestiture of its Spin Forge divisionunder an agreement that involved subleasing the Spin Forge real estate andleasing the manufacturing equipment and tooling to a third party. Under themaster agreement relating to this divestiture transaction, DMC sold allinventory, books and records, intangible personal property, businessinformation and technology, customer contracts, and licenses and permitsrelating to the Spin Forge business to this third party for a sales price ofapproximately $1.7 million. The third party also assumed full responsibilityfor Spin Forge business activities and operating expenses. Despite the factthat the Company retained ownership of the equipment and continued to carry acapital lease asset of $2,880 on its books, the Company concluded that the SpinForge divestiture transaction qualified for treatment as discontinuedoperations since the Company had completely exited the Spin Forge operatingbusiness and has no intent to ever again operate any of the leased assets. Tothe extent that the third party purchaser of the Spin Forge business does notexercise its option to purchase all or a portion of the leased equipment andtooling when the lease term expires on January 1, 2007, DMC plans toimmediately liquidate such equipment.

 

OnJanuary 10, 2006, the Company sold its purchase option on the Spin Forge realestate to the property owner for $2,300. The completion of this transactionresulted in a pretax gain of $2,200, which will be recorded as discontinuedoperations in the first quarter of 2006. In connection with the sale of thepurchase option, the underlying lease agreement was terminated. Accordingly,the capital lease asset of $2,880 and the related lease obligation of the sameamount will be removed from the Company’s balance sheet in the first quarter of2006.

 

Assetsof discontinued operations, all related to Spin Forge, are comprised of thefollowing as of December 31:

 
| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Leased manufacturing equipment          |       | $        | 859        |     | $          | 1,012 |   |
| Capital lease asset - real estate       |       | 2,880    |       | 2,880    |       |
|                                    |       |     |       |     |       |
| Total assets of discontinued operations |       | $        | 3,739      |     | $          | 3,892 |   |

 

TheCompany is receiving rent of $23 per month on the leased manufacturingequipment through the end of the initial lease term, which expires in December2006. As part of the September 17, 2004 divestiture of Spin Forge, the Companysold inventory totaling $1,697 and the sale of this inventory was reflected inother receivables ($943 as current and $754 as long-term) as of December 31,2004. As of December 31, 2005, the unpaid balance of this receivable is $681and is classified as long-term based on the payment schedule specified in thedivestiture agreement.

 

60

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Operatingresults of the discontinued operations (formerly included in the AerospaceGroup) for the years ended December 31, 2004 and 2003 are summarized as follows(there is no 2005 impact):

 
| ** **                                           | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Net sales:                                           |       |                                 |       |   |   |
| PMP division                                         |       | $                                    | —     |   | $ | 1,533 |   |
| Spin Forge division                                  |       | 1,790                                |       | 4,499 |   |
| Total net sales                                      |       | $                                    | 1,790      |   | $ | 6,032 |   |
|                                                 |       |                                 |       |   |   |
| Loss from discontinued operations:                   |       |                                 |       |   |   |
| PMP division                                         |       | $                                    | —     |   | $ | (962 | ) |
| Spin Forge division                                  |       | (1,284                               | )          | (1,142 | ) |
| Total loss from discontinued operations              |       | (1,284                               | )          | (2,104 | ) |
|                                                 |       |                                 |       |   |   |
| Tax benefit:                                         |       |                                 |       |   |   |
| PMP division                                         |       | —                               |       | 375 |   |
| Spin Forge division                                  |       | 501                                  |       | 446 |   |
| Total tax benefit                                    |       | 501                                  |       | 821 |   |
| Loss from discontinued operations, net of  tax       |       | $                                    | (783       | ) | $ | (1,283 | ) |
|                                                 |       |                                 |       |   |   |
| Loss on sale of discontinued operations:             |       |                                 |       |   |   |
| PMP division                                         |       | $                                    | —     |   | $ | (1,164 | ) |
| Spin Forge division                                  |       | (1,290                               | )          | — |   |
| Total loss on sale of discontinued  operations       |       | (1,290                               | )          | (1,164 | ) |
|                                                 |       |                                 |       |   |   |
| Tax benefit:                                         |       |                                 |       |   |   |
| PMP division                                         |       | —                               |       | 454 |   |
| Spin Forge division                                  |       | 503                                  |       | — |   |
| Total tax benefit                                    |       | 503                                  |       | 454 |   |
| Loss on sale of discontinued operations, net  of tax |       | $                                    | (787       | ) | $ | (710 | ) |

 

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**ITEM**9.**       Changes inand Disagreements with Accountants on Accounting and Financial Disclosure**

 

Thereare no changes in or disagreements with accountants on accounting and financialdisclosure for the fiscal year ended December 31, 2005.

 

**ITEM**9A**.     Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

OurChief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based onsuch evaluation, such officers have concluded that our disclosure controls andprocedures are effective as of the end of the period covered by this AnnualReport.

 

62

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**Management’s Report on Internal Control over FinancialReporting**

 

Themanagement of Dynamic Materials Corporation (“DMC”) is responsible forestablishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f). Under the supervision and with the participation of DMC’smanagement, including its Chief Executive Officer and Chief Financial Officer,management conducted an evaluation of the effectiveness of DMC’s internalcontrol over financial reporting as of December 31, 2005 based on theframework in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Indesigning and evaluating the internal control over financial reporting,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Basedon that evaluation, management concluded that DMC’s internal control overfinancial reporting was effective as of December 31, 2005.

 

Management’sassessment of the effectiveness of DMC’s internal control over financialreporting as of December 31, 2005 has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in theirreport which is included elsewhere herein.

 

 
|   | /s/  Yvon Pierre Cariou       |   |
|--------|-----------------------------------------|--------|
|   | Yvon Pierre Cariou                      |
|   | President  and Chief Executive Officer  |
|   | March  14, 2006                         |
|   |                                    |
|   | /s/  Richard  A. Santa        |   |
|   | Richard  A. Santa                       |
|   | Vice  President Chief Financial Officer |
|   | March  14, 2006                         |
|        |                                         |        |  |

 

63

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**Report of Independent Registered Public AccountingFirm**

 

TheStockholders and the

Boardof Directors of Dynamic Materials Corporation:

 

Wehave audited management’s assessment, included in the accompanying Management’sReport on Internal Control over Financial Reporting, that Dynamic MaterialsCorporation (the “Company) maintained effective internal control over financialreporting as of December 31, 2005, based on criteria established inInternal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).Dynamic Materials Corporation’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, management’s assessment that Dynamic Materials Corporationmaintained effective internal control over financial reporting as ofDecember 31, 2005, is fairly stated, in all material respects, based onthe COSO criteria. Also, in our opinion, Dynamic Materials Corporationmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on the COSO criteria**.**

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofDynamic Materials Corporation and subsidiary as of December 31, 2005 and2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period endedDecember 31, 2005 and our report dated March 10, 2006 expressed anunqualified opinion thereon.

 

 
|              |  /s/ Ernst & Young LLP |   |
|-------------------|--------------------------------------|--------|
|              |                                 |
| Denver,  Colorado |                                 |
| March  10, 2006   |                                 |

 

64

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**ITEM**9B**.               OtherInformation**

 

Notapplicable.

 

65

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**PART III**

 

**ITEM**10.**                                               ****Directors and ExecutiveOfficers of the Registrant**

 

**Directors**

 

**Mr. Michel Nicolas.**Mr.Nicolas, age 66, has served as a director since June 2004. He is currentlyExecutive Vice President, Chemicals of Groupe SNPE, a position he has heldsince June 2004. Mr. Nicolas has spent most of his career with Groupe SNPE and,from January 1996 through May 2004, was Senior Vice President, Industrial Affairsand Development.

 

**Mr. Michel Rieusset.**Mr.Rieusset, age 52, has served as a director since November 2004. He is currentlyGeneral Counsel of Groupe SNPE, a position he has held since September 2004.Prior to joining Groupe SNPE, Mr. Rieusset served as General Counsel of Franceof Havas from September 2002 to April 2004, as General Counsel of MotorolaFrance from October 1999 to September 2002, and as Senior Counsel of GroupeBongrain from April 1991 to October 1999.

 

**Mr. Francois Schwartz.**Mr. Schwartz, age 59, has served as adirector since January 2004. He is currently the Corporate Senior VicePresident, Financial and Legal Affairs of Groupe SNPE, a position he has heldsince July 2003. Prior to joining Groupe SNPE, Mr. Schwartz had served as DeputySenior Vice President, Finance of the Renault Group from February 2002 to July2003 and Deputy Chief Financial Officer of the Renault Group from 1993 toFebruary 2002.

 

**Mr. Bernard Zeller.**Mr.Zeller, age 59, has served as a director since January 2005. He is currentlySenior Vice President Strategy and Development of Groupe SNPE, a position hehas held since January 2005. He has spent his entire career with Groupe SNPE.Mr. Zeller served as CEO of PyroAlliance, an advanced ordnance pyrotechnicssubsidiary of Groupe SNPE, from September 1994 through December 2004 and asVice President Development of SNPE Matériaux Energétiques from January 2001 toDecember 2004. He has also served as CEO of Structil, an advanced compositematerials subsidiary of Groupe SNPE, since January 2000.

 

**Mr. Dean K. Allen.**Mr. Allen, age 70, has served as a directorsince July 1993. In January 2001, Mr. Allen retired as President of ParsonsEurope, Middle East and South Africa, a position he had held since February1996. Mr. Allen was Vice President and General Manager of Raytheon Engineersand Constructors, Europe, from February 1994 to December 1995, and currentlyserves as a director for Techo Consult International.

 

**Dr. George W. Morgenthaler.**Dr. Morgenthaler, age 79, has served as adirector since June 1986. Dr. Morgenthaler also served as a directorduring the period from 1971 to 1976. Dr. Morgenthaler has been a Professor ofAerospace Engineering at the University of Colorado at Boulder since 1986. Hehas served as Department Chair, Director of the University of Colorado’sBioServe Commercial Space Center and Associate Dean of Engineering forResearch. Previously, Dr. Morgenthaler was Vice President of Martin MariettaAerospace and Martin Marietta Aluminum Companies, Vice President PrimaryProducts Division of Martin Marietta Aluminum Co. and Vice President andGeneral Manager of the Baltimore Division of Martin Marietta Aerospace Co. Dr.Morgenthaler served as a director of Computer Technology Assoc. Inc. from 1993to 1999 and served as a director of Columbia Aluminum Company from 1987 to 1996and currently serves as a director for VeriFax Inc.

 

**Mr. Gerard Munera.**Mr. Munera, age 70, has served as a directorsince September 2000. From October 1996 to the present, Mr. Munera has beenGeneral Manager of Synergex Group LLC, a personally controlled holding companywith diversified investments, including real estate, securities, gold miningand high technology industries. Mr. Munera is also Director of SiVault Systems,Inc., Meridian Gold Inc., Mag Industries Corporation and Nevsun Resources Ltd.Between 1990 and 1991, Mr. Munera was Senior Vice President of CorporatePlanning and Development and a member of the Executive Committee of RTZ plc.Between 1991 and 1994, Mr. Munera was President of Minorco (USA), a diversified$1.5 billion natural resources group. From 1994 to October 1996, Mr. Munera wasChairman and CEO of Latin American Gold Inc., a gold exploration and miningcompany.

 

66

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**Executive Officers**

 

Thefollowing individuals serve as executive officers. Each executive officer isappointed by the Board of Directors and serves at the pleasure of the Board.

 
| **Name**                | ** ** | **Position**                                              | ** ** | **Age** | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|---------|------------|
|                    |       |                                                      |       |    |       |
| Mr. Yvon  Pierre Cariou |       | President  and Chief Executive Officer                    |       | 60      |       |
| Mr. Richard  A. Santa   |       | Vice  President, Chief Financial Officer and Secretary    |       | 55      |       |
| Mr. John G.  Banker     |       | Vice  President, Marketing and Sales, Clad Metal Division |       | 59      |       |

 

**Mr. Yvon Pierre Cariou.**Mr. Cariou has served as President and ChiefExecutive Officer since November 2000. From March 2000 to November 2000, Mr.Cariou was a consultant who performed research and development projects for theoil industry and market research for a start-up company. From November 1998 toMarch 2000, Mr. Cariou was President and Chief Executive Officer of AstrocosmosMetallurgical Inc., a division of Groupe Carbone Lorraine of France, involvedin the design and fabrication of process equipment for the chemical andpharmaceutical industries. From September 1993 to September 1998, Mr. Cariouwas a Partner and Vice President Sales and Marketing of Hydrodyne/FPI Inc., anaerospace components manufacturer specializing in liquid propulsion. FromJanuary 1991 to September 1993, Mr. Cariou was President of MAINCO Corp., anelevator design, build and service company and a division of Nu-Swift, a publiccompany based in the United Kingdom. Earlier in his career, Mr. Cariou servedas President/CEO of L.A. Water Treatment Inc., an industrial and municipalwater treatment systems company and a subsidiary of London-based Thames WaterPlc and as President/CEO of Goldsworthy Engineering, a specialist in theengineering and manufacture of automated systems for the laying of aerospacecomposite materials. He also spent fifteen years with Carbone Lorraine, aglobal industrial components manufacturer, where he held various executivepositions in France and the United States, including President of Carbone USACorp.

 

**Mr. Richard A. Santa.**Mr. Santa has served as Vice President, ChiefFinancial Officer and Secretary since October 1996 and served as interim ChiefFinancial Officer from August 1996 to October 1996. Prior to joining us inAugust 1996, Mr. Santa was Corporate Controller of Scott Sports Group Inc. fromSeptember 1993 to April 1996. From April 1996 to August 1996, Mr. Santa was aprivate investor. From June 1992 to August 1993, Mr. Santa was Chief FinancialOfficer of Scott USA, a sports equipment manufacturer and distributor. Earlierin his career, Mr. Santa was a senior manager with Price Waterhouse, where hewas employed for ten years.

 

**Mr. John G. Banker.**Mr. Banker has served as Vice President,Marketing and Sales, Clad Metal Division since June 2000. From June 1996 toJune 2000, Mr. Banker was President of CLAD Metal Products, Inc. From June 1977to June 1996, Mr. Banker was employed by us and served in various technical,sales and management positions. Mr. Banker held the position of Senior VicePresident, Sales and New Business Development from June 1991 to July 1995.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section16(a) of the Securities Exchange Act of 1934 requires our directors andofficers, and persons who own more than 10% of a registered class of our equitysecurities, to file with the SEC an initial report of ownership and to reportchanges in ownership of our common stock and other equity securities. Officers,directors and greater than 10% stockholders are required by SEC regulations tofurnish us with copies of all Section 16(a) forms they file.

 

Toour knowledge, based solely on a review of the copies of such reports furnishedto us and written representations that no other reports were required, duringthe fiscal year ended December 31, 2005, all Section 16(a) filing requirementsapplicable to our officers, directors and greater than 10% beneficial ownerswere complied with and filed on time, except that on one occasion each, Mr.Cariou and SNPE inadvertently failed to timely file a Form 4. These forms weresubsequently filed reporting the appropriate information.

 

Wehave adopted a Code of Ethics applicable to each of the Named ExecutiveOfficers. The Code of Ethics has been posted on our website,www.dynamicmaterials.com.

 

67

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**ITEM**11.**                ExecutiveCompensation**

 

Thefollowing table shows compensation awarded or paid to, or earned by, ourexecutive officers (each, a “Named Executive Officer”) during the fiscal yearsended December 31, 2005, 2004 and 2003:

 

**Summary Compensation Table**

 
| ** **              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **    | ** ** | ** **               | ** ** | **Long Term Compensation** | ** ** |
|-------------------------|------------|------------|------------|-------------------------|------------|---------------|------------|--------------------------|------------|----------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Awards**    | ** ** |
| **Name and Principal**  | ** ** | **Fiscal** | ** ** | ** **              | ** ** | ** **    | ** ** | **Other Annual**         | ** ** | ** **                 | ** ** | **All Other** | ** ** |
| **Position**            | ** ** | **Year**   | ** ** | **Salary ($)**          | ** ** | **Bonus ($)** | ** ** | **Compensation ($) (1)** | ** ** | **Options (#)**            | ** ** | **Compensations ($)** | ** ** |
| Yvon Pierre Cariou      |       | 2005       |       | 290,000                 |       | 440,580       |       | —                   |       | 40,000                     |       | 12,669 | (2) |
| President and           |       | 2004       |       | 260,000                 |       | 169,250       |       | —                   |       | —                     |       | 10,700 | (3) |
| Chief Executive Officer |       | 2003       |       | 240,000                 |       | —        |       | —                   |       | 64,000                     |       | 13,604 | (4) |
|                    |       |       |       |                    |       |          |       |                     |       |                       |       |   |   |
| Richard A. Santa        |       | 2005       |       | 223,500                 |       | 139,400       |       | —                   |       | 30,000                     |       | 11,521 | (5) |
| Vice President, Chief   |       | 2004       |       | 217,000                 |       | 86,800        |       | —                   |       | —                     |       | 11,285 | (6) |
| Financial Officer and   |       | 2003       |       | 211,000                 |       | —        |       | —                   |       | 48,000                     |       | 12,947 | (7) |
| Secretary               |       |       |       |                    |       |          |       |                     |       |                       |       |   |   |
|                    |       |       |       |                    |       |          |       |                     |       |                       |       |   |   |
| John G. Banker          |       | 2005       |       | 200,000                 |       | 170,000       |       | —                   |       | 30,000                     |       | 9,997 | (8) |
| Vice President,         |       | 2004       |       | 145,000                 |       | 179,600       |       | —                   |       | —                     |       | 10,569 | (9) |
| Sales and Marketing     |       | 2003       |       | 132,500                 |       | 52,500        |       | —                   |       | 48,000                     |       | 8,986 | (10) |

 

----

1)              Except as disclosed in this column, theamount of perquisites provided to each Named Executive Officer did not exceedthe lesser of $50,000 or 10% of total salary and bonus for each fiscal year.

2)              Includes $3,300 of life insurance premiumsand $9,369 of matching contributions under the 401(k) plan.

3)              Includes $3,300 of life insurance premiumsand $7,400 of matching contributions under the 401(k) plan.

4)              Includes $3,300 of life insurance premiumsand $10,304 of matching contributions under the 401(k) plan.

5)              Includes $3,269 of life insurance premiumsand $8,252 of matching contributions under the 401(k) plan.

6)              Includes $3,273 of life insurance premiumsand $8,012 of matching contributions under the 401(k) plan.

7)              Includes $3,269 of life insurance premiumsand $9,678 of matching contributions under the 401(k) plan.

8)              Includes $2,305 of life insurance premiums and $7,692 of matching contributionsunder the 401(k) plan.

9)              Includes $3,757 of life insurance premiumsand $6,812 of matching contributions under the 401(k) plan.

10)        Includes$3,189 of life insurance premiums and $5,797 of matching contributions underthe 401(k) plan.

 

**Stock Options**

 

Wegrant options to our executive officers, among others, under our 1997 Plan. Asof February 28, 2006, options to purchase a total of 594,926 shares wereoutstanding under this plan and options to purchase 18,074 shares remainedavailable for grant thereunder.

 

68

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Thefollowing table shows certain information regarding options granted to theabove-referenced officers during the fiscal year ended December 31, 2005:

 

**OPTIONS GRANTS IN FISCAL YEAR 2005**

 
| ** **         | ** ** | **Individual Grants** | ** ** | ** **     | ** ** |
|--------------------|------------|-----------------------|------------|----------------|------------|
| ** **         | ** ** | ** **            | ** ** | **Percent of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Number of**         | ** ** | **Total**      | ** ** | ** ** | ** ** | ** ** | ** ** | **Potential Realizable Value at** | ** ** |
| ** **         | ** ** | **Securities**        | ** ** | **Options**    | ** ** | ** ** | ** ** | ** ** | ** ** | **Assumed Annual Rates of** | ** ** |
| ** **         | ** ** | **Underlying**        | ** ** | **Granted to** | ** ** | **Exercise or** | ** ** | ** ** | ** ** | **Stock Price Appreciation** | ** ** |
| ** **         | ** ** | **Options**           | ** ** | **Employees**  | ** ** | **Base Price** | ** ** | **Expiration** | ** ** | **for Option Team** | ** ** |
| **Name**           | ** ** | **Granted (#)**       | ** ** | **in 2005**    | ** ** | **($/Sh)** | ** ** | **Date** | ** ** | **5% ($)** | ** ** | **10% ($)** | ** ** |
| Yvon Pierre Cariou |       | 40,000                |       | 22.7           | %          | $ | 4.87 |   | 1/21/2015 |   | 122,509 |   | 310,461 |   |
| Richard A. Santa   |       | 30,000                |       | 17.0           | %          | $ | 4.87 |   | 1/21/2015 |   | 91,882 |   | 232,846 |   |
| John G. Banker     |       | 30,000                |       | 17.0           | %          | $ | 4.87 |   | 1/21/2015 |   | 91,882 |   | 232,846 |   |

 

The following table showsfor the fiscal year ended December 31, 2005, certain information regardingoptions exercised by, and held at year-end by, the above-referenced officers:

 

**OPTIONEXERCISES IN FISCAL YEAR 2005 AND FISCAL YEAR-END OPTION VALUES**

 
| ** **         | ** ** | ** **          | ** ** | ** **       | ** ** | **Number of**         | ** ** | ** **                | ** ** |
|--------------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **         | ** ** | ** **          | ** ** | ** **       | ** ** | **Securities**        | ** ** | **Value of**              | ** ** |
| ** **         | ** ** | ** **          | ** ** | ** **       | ** ** | **Underlying**        | ** ** | **Unexercised**           | ** ** |
| ** **         | ** ** | ** **          | ** ** | ** **       | ** ** | **Unexercised**       | ** ** | **In-the-Money**          | ** ** |
| ** **         | ** ** | ** **          | ** ** | ** **       | ** ** | **Options at**        | ** ** | **Options at**            | ** ** |
| ** **         | ** ** | ** **          | ** ** | ** **       | ** ** | **December 31, 2005** | ** ** | **December 31, 2005 (1)** | ** ** |
| ** **         | ** ** | **Shares Acquired** | ** ** | **Value**        | ** ** | **Exercisable/**      | ** ** | **Exercisable/**          | ** ** |
| **Name**           | ** ** | **on Exercise (#)** | ** ** | **Realized ($)** | ** ** | **Unexercisable**     | ** ** | **Unexercisable**         | ** ** |
| Yvon Pierre Cariou |       | 120,000             |       | 2,344,253        |       | 17,000 / 87,000       |       | $488,000 / $2,349,900     |       |
| Richard A. Santa   |       | 195,000             |       | 3,071,055        |       | 43,500 / 65,500       |       | $1,241,790 / $1,769,570   |       |
| John G. Banker     |       | 98,250              |       | 1,884,579        |       | 6,250 / 65,500        |       | $178,750 / $1,769,570     |       |

 

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(1)          i.e.,value of options for which the fair market value of the common stock atDecember 31, 2005 ($30.02) exceeds the exercise price.

 

69

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**ITEM**12.**                                               ****Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

 

Thefollowing table sets forth certain information regarding the ownership of ourcommon stock as of February 28, 2006 by: (i) each person or group known by usto be the beneficial owner of more than 5% of our common stock, (ii) each ofour directors; (iii) each of our executive officers; and (iv) all executiveofficers and directors as a group.

 
| ** **                                                        | ** ** | **Beneficial Ownership (1)** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
| **Name and Address (2) of  Beneficial Owner**                     | ** ** | **Number  of Shares**        | ** ** | **Percent  of Total** | ** ** |
|                                                              |       |                         |       |   |   |
| SNPE, Inc. (3)  101 College Road East  Princeton, NJ 08540        |       | 5,926,982                    |       | 50.35 |   |
|                                                              |       |                         |       |   |   |
| Mr. Yvon  Pierre Cariou (4)                                       |       | 74,440                       |       | * |   |
|                                                              |       |                         |       |   |   |
| Mr. Richard  A. Santa (4)                                         |       | 121,184                      |       | 1.02 |   |
|                                                              |       |                         |       |   |   |
| Mr. John G.  Banker (4)                                           |       | 36,158                       |       | * |   |
|                                                              |       |                         |       |   |   |
| Mr. Michel  Nicolas (4)                                           |       | 15,000                       |       | * |   |
|                                                              |       |                         |       |   |   |
| Mr. Bernard  Zeller (4)                                           |       | —                       |       | * |   |
|                                                              |       |                         |       |   |   |
| Mr. Michel  Rieusset (4)                                          |       | 15,000                       |       | * |   |
|                                                              |       |                         |       |   |   |
| Mr. Francois  Schwartz (4)                                        |       | 3,672                        |       | * |   |
|                                                              |       |                         |       |   |   |
| Mr. Dean K.  Allen (4)                                            |       | 46,000                       |       | * |   |
|                                                              |       |                         |       |   |   |
| Dr. George  W. Morgenthaler (4)                                   |       | 118,756                      |       | 1.01 |   |
|                                                              |       |                         |       |   |   |
| Mr. Gerard  Munera (4)                                            |       | —                       |       | * |   |
|                                                              |       |                         |       |   |   |
| All  executive officers and directors as a group (5) (10 persons) |       | 430,210                      |       | 3.58 |   |

 

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*              Less than 1%

 

(1)                                  This table is based upon information suppliedby officers, directors and principal stockholders and Schedules 13D and 13G, ifany, filed with the Securities and Exchange Commission. Unless otherwiseindicated in the footnotes to this table and subject to community property lawswhere applicable, we believe that each of the stockholders named in this tablehas sole voting and investment power with respect to the shares indicated asbeneficially owned. Applicable percentages are based on 11,772,420 sharesoutstanding on February 28, 2006, adjusted as required by rules promulgated bythe SEC.

 

(2)                                  Unless otherwise indicated, the address ofeach beneficial owner is c/o Dynamic Materials Corporation, 5405 Spine Road,Boulder, Colorado 80301.

 

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(3)                                  The information reported is based solely oninformation contained in the Forms 4 or 13D filed by each of SNPE, Inc.,SOFIGEXI, and SNPE. Each reported that it had shared voting and investmentpower and beneficial ownership of 5,926,982 shares. Mr. Nicolas, Mr. Rieusset,Mr. Schwartz, and Mr. Zeller, all of whom are our directors, are officers ofSNPE, or its affiliates or subsidiaries.

 

(4)                                  Amounts reported include shares subject tostock options exercisable within 60 days of February 28, 2006 as follows: Mr.Cariou, 49,500 shares; Mr. Santa, 68,250 shares; Mr. Banker, 31,000 shares; Mr.Nicolas, 15,000 shares; Mr. Zeller, 0 shares; Mr. Rieusset, 15,000 shares; Mr.Schwartz, 3,672 shares; Mr. Allen, 30,000 shares; Dr. Morgenthaler, 40,000shares; and Mr. Munera, 0 shares. Shares of common stock subject to optionsthat are exercisable within 60 days of February 28, 2006 are deemed to bebeneficially owned by the person holding those options for the purpose ofcomputing the percentage ownership of the person, but are not treated asoutstanding for the purpose of computing any other person’s percentageownership.

 

(5)                                  The amount reported includes 252,422 sharessubject to stock options exercisable within 60 days of February 28, 2006. Theapplicable percentage is based on 12,024,842 shares outstanding, which includesshares subject to stock options exercisable within 60 days.

 

EQUITY COMPENSATION PLAN INFORMATION

 

Thefollowing table sets forth certain information regarding the equitycompensation plan as of December 31, 2005:

 
| ** **                                                  | ** ** | ** **                  | ** ** | ** **               | ** ** | **Number of securities**    | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **Number of securities to** | ** ** | **Weighted average**     | ** ** | **remaining available for** | ** ** |
| ** **                                                  | ** ** | **be issued upon exercise** | ** ** | **exercise price of**    | ** ** | **future issuance under**   | ** ** |
| ** **                                                  | ** ** | **of outstanding options,** | ** ** | **outstanding options,** | ** ** | **equity compensation**     | ** ** |
| **Plan Category**                                           | ** ** | **warrants and rights**     | ** ** | **warrants and rights**  | ** ** | **plans**                   | ** ** |
|                                                        |       |                        |       |                     |       |                        |       |
| Equity compensation plans approved by security  holders     |       | 588,426                     |       | $                        | 4.77       |                        | 38,074     |   |
|                                                        |       |                        |       |                     |       |                        |       |
| Equity compensation plans not approved by security  holders |       | 0                           |       | $                        | 0.00       |                        | 0          |   |
|                                                        |       |                        |       |                     |       |                        |       |
|                                                        |       | 588,426                     |       | $                        | 4.77       |                        | 38,074     |   |

 

**ITEM**13.**                CertainRelationships and Related Transactions**

 

OnMarch 16, 2001, we announced that we had reached agreement to acquire 100% ofthe stock of Nobelclad and Nitro Metall from NEF. Nobelclad and Nitro Metalloperate cladding businesses located in Rivesaltes, France and Likenas, Sweden,respectively, which generated combined revenues of approximately $10.5 millionin calendar year 2000. NEF is wholly owned by Groupe SNPE and is a sistercompany to SNPE, which owns approximately 51% of our common stock. Mr. FrancoisSchwartz, a director, is the President of SNPE. The acquisition closed on July3, 2001. The purchase price was financed through a $4.0 million intercompanynote agreement between us and SNPE and the assumption of $1.23 million in thirdparty bank debt associated with Nobelclad’s acquisition of Nitro Metall fromNEF prior to our purchase of Nobelclad stock.

 

Wehave a sales commission agreement with Clad Metal Products, Inc, which is 100%owned by Mr. John Banker, an executive officer. Under this agreement, we willpay Clad Metal Products, Inc. 20% of the commissions that it earns

 

71

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on sales of certain non-explosion cladproducts. During fiscal year 2005, $13,327 was earned in commission and wassubsequently paid in 2006.

 

Nobelclad purchases explosives used in its cladding operation fromNobel Explosifs France, which is a wholly owned subsidiary of Groupe SNPE.  For the years ended December 31, 2005, 2004and 2003, these purchases totaled $820, $739, and $445, respectively.  Accounts payable as of December31, 2005 and 2004 include outstanding amounts of $229 and $298, respectivelyrelating to these purchases.

 

**ITEM**14**.                PrincipalAccountant Fees and Services**

 

**Audit Committee Pre-Approval Policies and Procedures**

 

Inaccordance with the SEC’s rules requiring the Audit Committee to pre-approveall audit and non-audit services provided by our independent auditor, the AuditCommittee has adopted a formal policy on auditor independence requiring theapproval by the Audit Committee of all professional services rendered by ourindependent auditor prior to the commencement of the specified services. TheAudit Committee approved all services performed by Ernst &Young LLP(“E&Y”) in fiscal year 2005 in accordance with our formal policy on auditorindependence.

 

**Audit Fees**

 

Wepaid E&Y approximately $406,000 and $150,000 for aggregate fees billed forprofessional services rendered for the audit of our 2005 and 2004 annualfinancial statements and review of our 2005 and 2004 quarterly financialstatements.

 

**Audit Related Fees**

 

Wepaid E&Y approximately $13,500 and $2,250 in audit related fees for the2005 and 2004 fiscal years respectively. 

 

**Tax Fees**

 

Wepaid E&Y approximately $13,000 and $11,200 for fees related to federal andstate tax compliance during the fiscal year 2005 and 2004. We also paidapproximately $93,000 and $28,450 during 2005 and 2004 for tax advice and taxplanning.

 

**All Other Fees**

 

Wedid not pay out any fees in 2005 or 2004 for other professional services.

 

**ITEM**15.**                                               ****Exhibits and FinancialStatement Schedules**

 

(a)           **FinancialStatements**

 

SeeIndex to Financial Statements in Item 8 of this Annual Report on Form 10-K,which is incorporated herein by reference.

 

 (b)          **Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                       |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Employee  Stock Purchase Plan, dated January 9, 1998 (incorporated by reference to the  Company’s Definitive Proxy Statement filed with the Commission on  April 22, 1998). |
| 10.2                |       | Operating  Lease, dated as of March 18, 1998, between Company and Spin Forge, LLC  (incorporated by                                                                                   |

 

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|   |   | reference  to the Company’s Form 8-K filed with the Commission on April 2, 1998).                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3   |   | Option  Agreement, dated as of March 18, 1998, between Company and Spin Forge, LLC  (incorporated by reference to the Company’s Form 8-K filed with the  Commission on April 2, 1998).                                        |
| 10.4   |   | Loan  Agreement between Company and Fayette County Industrial Development  Authority, dated September 1, 1998 (incorporated by reference to the  Company’s Form 10-Q filed with the Commission on November 17, 1998).              |
| 10.5   |   | Amended  and Restated Employee Stock Option Plan approved by the Directors of the  Company on March 26, 1999 (incorporated by reference to the Company’s  Definitive Proxy Statement filed with the Commission on April 26, 1999). |
| 10.6   |   | Stock  Purchase Agreement, dated January 20, 2000, between the Company and SNPE,  Inc. (incorporated by reference to the Company’s Form 8-K filed with the  Commission on January 31, 2000).                                       |
| 10.7   |   | Agreement  and Amendment to Operating Lease, dated as of February 1, 2000 between  the Company and Spin Forge, LLC (incorporated by reference to the Company’s Form  10-K filed with the Commission on March 30, 2000).       |
| 10.8   |   | Form  of Directors and Officers Indemnification Agreement (incorporated by  reference to the Company’s Form 10-K filed with the Commission on March 30,  2000).                                                                    |
| 10.9   |   | Stock  Purchase Agreement, dated as of January 20, 2000, between the Company and  SNPE, Inc. (incorporated by reference to the Company’s Definitive Proxy  Statement filed with the Commission on May 9, 2000).                    |
| 10.10  |   | Amendment  Number One to Stock Purchase Agreement, dated as of April 20, 2000, between  the Company and SNPE, Inc. (incorporated by reference to the Company’s Form  10-Q filed with the Commission on May 12, 2000).              |
| 10.11  |   | Credit  Facility and Security Agreement, dated as of June 14, 2000, between the  Company and SNPE, Inc. (incorporated by reference to the Company’s Form 8-K  filed with the Commission on June 22, 2000).                         |
| 10.12  |   | Convertible  Subordinated Note, dated as of June 14, 2000, between the Company and SNPE,  Inc. (incorporated by reference to the Company’s Form 8-K filed with the  Commission on June 22, 2000).                                  |
| 10.13  |   | Stock  Purchase Agreement, dated June 28, 2001, between DMC and Nobel Explosifs  France (incorporated by reference to the Company’s Form 8-K filed with the  Commission on July 16, 2001).                                         |

 

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| 10.14 |   | Term  Loan Agreement, dated July 3, 2001, between DMC and SNPE, Inc. (incorporated  by reference to the Company’s Form 10-K filed with the Commission on March  26, 2002).                                                                                                                                              |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15 |   | Stock  Pledge Agreement, dated July 3, 2001, between DMC and SNPE, Inc.  (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 26, 2002).                                                                                                                                           |
| 10.16 |   | Credit  and Security Agreement, dated December 4, 2001, between DMC and Wells Fargo  Business Credit, Inc. (incorporated by reference to the Company’s Form 10-K  filed with the Commission on March 26, 2002).                                                                                                         |
| 10.17 |   | Agreement,  dated as of September 17, 2004, between the Company and Aerojet (incorporated  by reference to the Company’s Current Report on Form 8-K filed with the  Commission on September 23, 2004)                                                                                                                   |
| 10.18 |   | Transition  Services Agreement, dated as of September 17, 2004, between the Company and  Aerojet (incorporated by reference to the Company’s Current Report on Form  8-K filed with the Commission on September 23, 2004)                                                                                               |
| 10.19 |   | Equipment  Lease Agreement, dated as of September 17, 2004, between the Company and  Aerojet (incorporated by reference to the Company’s Current Report on Form  8-K filed with the Commission on September 23, 2004)                                                                                                   |
| 10.20 |   | Sublease,  dated as of September 17, 2004, between the Company and Aerojet (incorporated  by reference to the Company’s Current Report on Form 8-K filed with the  Commission on September 23, 2004)                                                                                                                    |
| 10.21 |   | Amendment  Number 5 to Option Agreement, , dated as of September 17, 2004, between the  Company and Spin Forge, LLC (incorporated by reference to the Company’s  Current Report on Form 8-K filed with the Commission on September 23, 2004)                                                                            |
| 10.22 |   | Option  Agreement, dated as of September 17, 2004, between the Company and Aerojet  (incorporated by reference to the Company’s Current Report on Form 8-K filed  with the Commission on September 23, 2004)                                                                                                            |
| 10.23 |   | Employment  Agreement, dated as of March 3, 2005, by and between the Company and Yvon  Cariou (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 22, 2005)                                                                                                                       |
| 10.24 |   | Employment  Agreement, dated as of March 3, 2005, by and between the Company and John G.  Banker (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 22, 2005)                                                                                                                    |
| 10.25 |   | Employment  Agreement, dated as of March 3, 2005, by and between the Company and Richard  A. Santa (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 22, 2005)                                                                                                                  |
| 10.26 |   | Credit  Agreement dated as of September 15, 2005 between Dynamic Materials  Corporation and Wells Fargo Bank, National Association (incorporated by  reference to the Company’s Current Report on Form8-K filed with the  Commission on September 21, 2005)                                                             |
| 10.27 |   | $7,500,000  Revolving Line of Credit Note dated September 15, 2005 of Dynamic Materials  Corporation payable to the order of Wells Fargo Bank, National Association  (incorporated by reference to the Company’s Current Report on Form 8-K filed  with the Commission on September 21, 2005)                           |
| 10.28 |   | Option  Purchase Agreement, dated November 4, 2005, by and between the Company and  Spin Forge, LLC (incorporated by reference to the Company Form 10-Q filed  with the Commission on November 9, 2005)                                                                                                                      |
| 10.29 |   | Supply  Agreement, dated as of November 29, 2005, by and between General Electric  Company, through its GE Energy Business, and Dynamic Materials Corporation,  through its AMK Welding Division (incorporated by reference to the Company’s  Current Report on Form 8-K filed with the Commission on December 5, 2005) |
| 21.1  |   | Subsidiaries  of the Company                                                                                                                                                                                                                                                                                                 |
| 23.1  |   | Consent  of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                             |
| 31.1  |   | Certification  of the President and Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)  or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                |
| 31.2  |   | Certification  of the Vice President and Chief Financial Officer pursuant to 17 CFR  240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                           |
| 32.1  |   | Certification  of the President and Chief Executive Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                       |
| 32.2  |   | Certification  of the Vice President and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                 |
| 99.1  |   | Letter  from DMC to the SEC regarding the Company’s Auditors (incorporated by  reference to the Company’s Form 10-K filed with the Commission on March 26,  2002).                                                                                                                                                 |

 

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(c)           **Financial StatementSchedules**

 

SeeSchedule II beginning on page 77 of this Annual Report on Form 10-K.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|            | **DYNAMIC MATERIALS CORPORATION** |
|-----------------|-----------------------------------|
|            | ** **                        |
|            |                              |   |   |
| March  14, 2006 | By:                               | /s/  Richard A. Santa |   |
|            |                              | Richard  A. Santa |
|            |                              | Vice  President and Chief Financial Officer |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Company and in thecapacities and on the dates indicated.

 
| **SIGNATURE**                 | ** ** | **TITLE**                                                   | ** ** | **DATE**        |
|-------------------------------|------------|-------------------------------------------------------------|------------|-----------------|
|                          |       |                                                        |       |            |
|   /s/ Yvon Pierre Cariou |       | President  and Chief Executive Officer                      |       | March  14, 2006 |
|   Yvon Pierre Cariou     |       | (Principal  Executive Officer)                              |       |            |
|                          |       |                                                        |       |            |
|   /s/ Richard A. Santa   |       | Vice  President and Chief Financial Officer                 |       | March  14, 2006 |
|   Richard A. Santa       |       | (Principal  Financial and Accounting Officer)               |       |            |
|                          |       |                                                        |       |            |
|   /s/ John G. Banker     |       | Vice  President, Marketing & Sales, Clad Metal Division |       | March  14, 2006 |
|   John G. Banker         |       | (Executive  Officer)                                        |       |            |
|                          |       |                                                        |       |            |
|   /s/ Michel Nicolas     |       | Chairman  and Director                                      |       | March  14, 2006 |
|   Michel Nicolas         |       |                                                        |       |            |
|                          |       |                                                        |       |            |
|   /s/ Dean K. Allen      |       | Director                                                    |       | March  14, 2006 |
|   Dean K. Allen          |       |                                                        |       |            |
|                          |       |                                                        |       |            |
|   /s/ Michel Rieusset    |       | Director                                                    |       | March  14, 2006 |
|   Michel Rieusset        |       |                                                        |       |            |
|                          |       |                                                        |       |            |
|   /s/ Francois Schwartz  |       | Director                                                    |       | March  14, 2006 |
|   Francois Schwartz      |       |                                                        |       |            |
|                          |       |                                                        |       |            |
|   /s/ Bernard Zeller     |       | Director                                                    |       | March  14, 2006 |
|   Bernard Zeller         |       |                                                        |       |            |
|                          |       |                                                        |       |            |
|   /s/ Gerard Munera      |       | Director                                                    |       | March  14, 2006 |
|   Gerard Munera          |       |                                                        |       |            |
|                          |       |                                                        |       |            |
| /s/  George W. Morgenthaler   |       | Director                                                    |       | March  14, 2006 |
| George  W. Morgenthaler       |       |                                                        |       |            |

 

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**DYNAMICMATERIALS CORPORATION**

**INDEX TOSCHEDULE II**

** **

**AS OFDECEMBER 31, 2005**

 
| ** **                                               | ** ** |
|----------------------------------------------------------|------------|
| Report of Independent  Registered Public Accounting Firm | 78         |
| Schedule II (a)                                          | 79         |
| Schedule II (b)                                          | 79         |
| Schedule II (c)                                          | 79         |

 

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**Report of Independent Registered Public AccountingFirm**

 

To the Stockholders and the 

Board of Directors of Dynamic Materials Corporation:

 

We have audited the consolidated financial statementsof Dynamic Materials Corporation and subsidiary as of December 31, 2005 and2004, and for each of the three years in the period ended December 31, 2005,and have issued our report thereon dated March 10, 2006 (included elsewhere inthis Form 10-K). Our audits also included the financial statement scheduleslisted in Item 15 of this Form 10-K. These schedules are the responsibility ofthe Company's management. Our responsibility is to express an opinion on theseschedules based on our audits.

 

In our opinion, the financialstatement schedules referred to above, when considered in relation to the basicfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

 

 
|              | /s/ ERNST  & YOUNG LLP |   |
|-------------------|----------------------------|--------|
| Denver,  Colorado |                       |
| March 10, 2006    |                       |

 

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DYNAMICMATERIALS CORPORATION

SCHEDULE II(a) - VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES

ALLOWANCEFOR DOUBTFUL ACCOUNTS

 
| ** **         | ** ** | **Balance at** | ** ** | **Additions**  | ** ** | **Accounts**    | ** ** | **Balance at** | ** ** |
|--------------------|------------|----------------|------------|----------------|------------|-----------------|------------|----------------|------------|
| ** **         | ** ** | **beginning**  | ** ** | **charged to** | ** ** | **receivable**  | ** ** | **end of**     | ** ** |
| ** **         | ** ** | **of period**  | ** ** | **income**     | ** ** | **written off** | ** ** | **period**     | ** ** |
| Year ended -       |       |           |       |           |       |            |       |           |       |
|               |       |           |       |           |       |            |       |           |       |
| December 31,  2003 |       | $              | 256        |           | $          | 15              |       | $              | (54        | ) | $ | 217 |   |
|               |       |           |       |           |       |            |       |           |       |
| December 31,  2004 |       | $              | 217        |           | $          | 85              |       | $              | (22        | ) | $ | 280 |   |
|               |       |           |       |           |       |            |       |           |       |
| December 31,  2005 |       | $              | 280        |           | $          | 49              |       | $              | (28        | ) | $ | 301 |   |

 

DYNAMICMATERIALS CORPORATION

SCHEDULE II(b) - VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES

WARRANTYRESERVE

 
| ** **         | ** ** | **Balance at** | ** ** | **Additions**  | ** ** | ** **  | ** ** | **Balance at** | ** ** |
|--------------------|------------|----------------|------------|----------------|------------|-------------|------------|----------------|------------|
| ** **         | ** ** | **beginning**  | ** ** | **charged to** | ** ** | **Repairs** | ** ** | **end of**     | ** ** |
| ** **         | ** ** | **of period**  | ** ** | **income**     | ** ** | **allowed** | ** ** | **period**     | ** ** |
| Year ended -       |       |           |       |           |       |        |       |           |       |
|               |       |           |       |           |       |        |       |           |       |
| December 31,  2003 |       | $              | 150        |           | $          | 28          |       | $              | (28        | ) | $ | 150 |   |
|               |       |           |       |           |       |        |       |           |       |
| December 31,  2004 |       | $              | 150        |           | $          | 30          |       | $              | (39        | ) | $ | 141 |   |
|               |       |           |       |           |       |        |       |           |       |
| December 31,  2005 |       | $              | 141        |           | $          | 498         |       | $              | (118       | ) | $ | 521 |   |

 

DYNAMICMATERIALS CORPORATION

SCHEDULE II(c) - VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES

INVENTORYRESERVE

 
| ** **         | ** ** | **Balance at** | ** ** | **Additions**  | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|--------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **         | ** ** | **beginning**  | ** ** | **charged to** | ** ** | **Inventory**  | ** ** | **end of**     | ** ** |
| ** **         | ** ** | **of period**  | ** ** | **income**     | ** ** | **write-offs** | ** ** | **period**     | ** ** |
| Year ended -       |       |           |       |           |       |           |       |           |       |
|               |       |           |       |           |       |           |       |           |       |
| December 31,  2003 |       | $              | 75         |           | $          | 53             |       | $              | (71        | ) | $ | 57 |   |
|               |       |           |       |           |       |           |       |           |       |
| December 31,  2004 |       | $              | 57         |           | $          | 170            |       | $              | (57        | ) | $ | 170 |   |
|               |       |           |       |           |       |           |       |           |       |
| December 31,  2005 |       | $              | 170        |           | $          | 158            |       | $              | (163       | ) | $ | 165 |   |

 

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